How can we help?

You can also find more resources in our Help Center.

136 terms

MacroEconomics : Test 1 Material

STUDY
PLAY
macroeconomics
the study of economy-wide phenomena, including inflation, unemployment, and economic growth
macroeconomics
growth of the economy and fluctuations in output, employment, and the general level of prices.
growth of output
makes higher levels of consumption and living standards possible
growth of output
the key to a higher living standard
fluctuations
can retard growth and generate economic hardship
Simon Kuznets
developed basic consecpts of national income accounting during the 1920 and 1930
Simon Kuznets
provided the methodology for modern national income accounting
Simon Kuznets
developed the first reliable national - income measures for the united states
GDP
the market value of final goods and services produced within a country during a specific time period
GDP
most widely used measure of economic performance
GDP
a "flow" concept
GDP
a measure of output
GDP
only final goods and services count towards the ______
GDP
only transactions involving production count towards the _______
GDP
only production within the country is counted towards the _____
GDP
a measure of domestic product during the current period
GDP
a measure of the value of the goods and services that were purchased by households, investors, governments, and foreigners
GDP
a measure of aggregated income
GDP
a measure of the market value of the output produced
GDP
a measure of the income generated by those who produced the output
GDP
counts only goods and services produced within the geographic borders of the country
GDP
a measure of both output and income
Expenditure approach
GDP can be reached by totaling the expenditures on goods and services produced during the year
Expenditure approach
has four components for calculating the GDP
Expenditure approach
personal consumption Expenditures, gross private domestic investment, government consumption, and gross investment are used to calculate this approach to calculating the GDP
consumption purchases
the largest component of GDP under the Expenditure approach
consumption purchases
household spending on consumer goods and services during the current period under the Expenditure approach
gross private investment
the production or construction of capital goods that provide a flow of future service
gross private investment
the flow of private sector expenditures on durable assets (fixed investments) plus the addition to inventories (inventory investment) during a period
gross private investment
expenditures enhance our ability to provide consumer benefits in the future
net investment
gross investment minus an allowance for depreciation and obsolescence of machinery and other physical assets during the year
depreciation
the estimated amount of physical capital (ex. machines, buildings) that is worn out or used up producing goods during a period
True
True/False - a substantial amount of net investment indicates that the capital stock of the economy is growing, thereby enhancing the economy's future productive potential
true
True/False - a low rate of net investment or a negative net investment implies a stagnagting or contracting economy
True
True/False - countries with a large net investment rate will tend to grow more rapidly than those with a low or negative rate of net investment
Resource cost income approach
uses aggregate income (compensation of employees, wages, salaries, income of self-employedproprietors, rents,profits, interest) non income cost items (indirect business taxes, depreciation) and Net income of foreigners to calculate GDP
Resource cost income approach
GDP can be calculated by summing the income payments to the resource suppliers of the things used to produce those goods and services
True
True/False - the dollar flo of expenditures on final goods = the dollar flow of income (and indirect cost) from final goods
GDP
only goods produced during the current pereiod are counted towards the _____
GDP
if a financial transaction involves a sales commission the commission is included in the _____ because it incolves a services rendered during the current period
intermediate goods
goods in intermediate stages not counted towards the GDP
final and market goods and services
those purchased for final use rather than of resale or futher proccessing
False
True/False - the purchases and sales of stocks, bonds, and US Securities are included in the GDP
True
True/False - Governement income transfer payments (social security, welfare, veterans payment) are also omitted from the GDP financial transactions/income transfers - move ownership from one party to another
goods and services produced
increases output by the amount the purchaser pays for the ________ . the total spending on all ______________ during the year is then summed to obttain the GDP
expansion in output
the source of higher income levels
expansion in output
the additional production of goods and services that people value
inventory investment
changes during the year in the market value of unsold goods on shelves and in warehouses
inventory investment
changes in the stock of unsold goods and raw materials held during a period
True
True/False - if business firms have more goods on hand at the end of the year than they had at the beginning of the year, inventory investment will be positive
GDP
inventory investment is added to the ______
GDP
includes the government consumption and gross investment
True
True/False - a decline in inventories would indicate that the purchases of goods and services exceeded current production
government consumption
includes expenditures on items like office supplies, law enforcement, and the operation of veteran hospitals which are consumed during the current period
government consumption
the purchase of long- lasting capital goods, like missiles, highways, and dams for flood control . as a result the government's total expenditures are substantially higher than its total consumption and investment expenditures
True
True/False - transfer payments are excluded from from GDP because they do not involve current production
True
True/False - government purchases are counted at their cost to taxpayers rather than their value to those receiving them
net exports
# of exports minus # of imports
exports
goods and services produced donestically but sold to foreigners
exports
domestically produced goods and services sold to foreigners
Imports
foreign produced goods and services purchases domestically
Imports
goods and service produced by foreign but purchased by domestic consumers, businesses, and governments
GDP
measure of domestic production -output produced within the borders of a nation
measuring GDP by the expenditure approach
add exports, subtract imports
net exports
total exports minus total imports = __________
positive net export
when we sell more to foreigners than we buy from them
negative net export
when we buy more from foreigners than we sell
GDP
developed to help us better access what is happening to output and income over time
True
True/False - expansion in the production of goods and services people value is the source of higher incomes and living standards
increase in nominal value of GDP
an expansion in the quanity of goods produced an _________
increase in nominal value of GDP
higher prices leads to an _______
nominal values
when tracking the path of GDP and other income measure across time periods economists use price indexes to adjust ____ for the effects of inflation
nominal values
also known as money values
nominal values
values expressed in current dollars
inflation
in increase in the general level of prices over time
real values
values that have been adjusted for the effects of inflation
Consumer price index
designed to measure the impact of price changes on the cost of the typical bundle of goods puchased by households
Consumer price index
an indicator of the general level of prices .
Consumer price index
attempts to compare the cost of purchasing the market basket bought by a typical consumer during a specific period with the cost of purchasing the same market basket during an earlier period
GDP deflator
a price index that reveals the cost during the current period of purchasing the items included in GDP relative to the cost during a base year
GDP deflator
measures the prices of capital goods and other goods and services purchased by businesses and governments
GDP deflator
designed to measure the change in the average price of the market basket of goods included in GDP
inflation
an increase in the general level of prices of goods and services
inflation
the purchasing power of the monetary unit such as the dollar declines when inflation is present
Real GDP
AKA CHAINED DOLLARS
Real GDP
the real stuff . The value of final goods and services produced in a given year when valued at the prices in a reference/previous year .
Nomial GDP
The value of final goods and services produced in a given year. the prices are valued at the prices in that same year
Nomial GDP
gross domestic product calculated at current price levels
Real GDP
the production of goods and services valued at constant prices
GDP
value of total production = Aggregate Income = Aggregate Expenditure
Aggravated Expenditure
the dollar amount of what buyers pay for it
Aggregate Income
what it cost to make things (profits and wages, expenses )
GDP
can be measured by calculating either aggregated expenditure or income (focused on aggregate expenditure)
consumption expenditure
abbreviated C
investment expenditure
abbreviated I
government expenditure
abbreviated G
Net Exports
abbreviated X, M or NX
Nominal GDP
can rise from one year to the next either
a) production rises or
b) prices rise ( inflations)
adjust for inflation = control for inflation
real GDP
is adjusted for changes in prices over time
real GDP
can only rise from one year to the next if production rises
real GDP
GDP adjusted for inflation
Nominall
example ::: top grossing movies in the box office and of all time ( # of tickets sold + amounts of tickets sold = top movies)
Real
movie popularitly not focused on amount of tickets
Business Cycle
the periodic irregular up and down movement in production and jobs
Business Cycle
the pattern of expansion and contraction in economic activity (economic fluctuations) around the growth trend in economic activity
Business Cycle
2 major phases . 2 turning points . (what goes up must come down)
Recession
a significant decline in activity spread across the economy, lasting more than a few months, visible in industrial production, employment , and whole sale retail trade
Peak
the turning point where it isnt changing at all (neighter up nor down ) ( in reality there is no zero you must look for the point of transition from positive to negative . )
Contraction
where Real GDP is going down lasting only 6 months (after 6 months or 2 quarters it becomes a recession)
Trough
bottom of the contraction
Economic Growth
generally calculated as the percentage change in real GDP from one year to the next
GDP
the total $$ value of all items that is produced using these resources
Expansion
rising
problems with GDP
only Final goods and services are counted . no intermediate goods are counted to avoid double counting . only the final product is used . (example: nails in a table. the table is counted. the nails used are not counted until the end)
problems with GDP
no used goods are counted . only realtor's commission on sale is included in GDP when existing home sells . no used homes are sold .
problems with GDP
non market production (any chores you do yourself)
problems with GDP
underground economy . paying someone (in cash) to clean your home and underreporting this $$$ amount (or not reporting this at all)
problems with GDP
focused on only what buyers pay for things
problems with GDP
biased upward (overstated, making it look too big) because more output now takes place in the market sector or the service section (food service, yard service) and less in the household sector
problems with GDP
biased downward (understated, making it look too small) because of failure to adjust for increased leisure, improvements in the world enviroment
aggravate income
focused on how much the household and the person earns
D

Sweden, where Saab is produced, counts the car as an export (X) which adds to Sweden's GDP.
US, where Saab is purchased, counts the purchase as an increase in consumer spending (C) when the car is sold at the dealership BUT it is ALSO counts as an IMPORT (M), which causes a reduction to NET EXPORTS (NX). Since the values of the purchase of the car (C) and the Import (M) are the same, there is no impact to the US GDP. Essentially, the Saab cancels itself out of counting in US's GDP.
General Motors Corporation (a U.S.-based firm) produces a Saab vehicle in Sweden, and sells it in the United States. In which country's GDP does the Saab increase GDP?

a)
Sweden and the United States

b)
The United States because it was sold there

c)
The United States because GM is a U.S. company

d)
Sweden because it was produced there
economics
the choices we must make among alternatives because of scarcity
False

macroeconomics focuses on the aggregate economy, and microeconomics focuses on small components of that economy.
True/False -
macroeconomics is concerned with economic policy, and microeconomics is concerned with economic theory
scarcity
the human desire for goods exceeds the amount freely available from nature.
D

this is the only option that would count since used products (old bike), previous purchases (lost ECON textbook), and nonmarket production (spouse cleaning house) do not count contribute to GDP.
Which of the following will contribute to GDP?

a)
Your spouse cleans your house every Thursday.

b)
You sell an old bicycle for $100.

c)
You find your lost economics textbook.

d)
You pay a doctor $200 to treat an arm that you broke in an accident.
B
this is the option that does not count towards GDP since it is part of nonmarket production.
Which of the following activities is not counted in our calculations of GDP?

a)
the purchase of a hammer for household repairs

b)
the labor services of a volunteer group building a home for a poor widow

c)
the purchase of new, domestically-produced tires for your old foreign car

d)
a haircut received and paid for at a beauty salon
C

by definition, nominal GDP measures current production using current prices whereas real GDP measures current production using base-year prices. The non-ECON example we discussed in class was nominal and real gross box office rankings. These rankings changed dramatically once the rise in ticket prices (inflation) was controlled for in the real rankings using base (or reference) year prices.
Which statement represents most correctly the relationship between nominal GDP and real GDP?

a)
Nominal GDP measures base-year production using base-year prices, whereas real GDP measures current production using current prices.

b)
Nominal GDP measures current production using base-year prices, whereas real GDP measures current production using current prices.

c)
Nominal GDP measures current production using current prices, whereas real GDP measures current production using base-year prices.

d)
Nominal GDP measures current production using current prices, whereas real GDP measures base-year production using base-year prices.
D

nominal GDP measures current production using current prices whereas real GDP measures current production using base-year prices. If nominal GDP increases, it could be due to an increase in production. Additionally, if nominal GDP increases, it could be due to an increase in prices (inflation). There is no way to discern what the reason for the increase in nominal GDP is. Real GDP uses base year prices so all inflation increases are eliminated. When real GDP increases it is due solely to an increase in production.
If nominal GDP increases by 4 percent, then

a)
real output has increased by 4 percent

b)
the price level has increased by 4 percent

c)
consumer spending must have increased by 4 percent

d)
it is possible that all of the increase was caused by an increase in the price level

e)
net exports increased by 4 percent
B

GDP = C + I + G + NX = C + I + G + (X - M) = 300 + 100 + 115 + (10 - 15) = 510
Use the table below to answer the next question.

Personal consumption expenditures
$300

Government consumption
115

Rent income
75

Investment expenditures
100

Imports
15

Personal savings
125

Exports
10

Depreciation
50

Gross domestic product equals

a) $550

b) $510

c) $595

d) $610
A

an item is counted in GDP when it is purchased (according to aggregate expenditure approach) which is not a problem if there are multiple time periods involved from time of production to time of purchase. The other 3 answer options are problems with GDP as discussed in class.
Which of the following is not a problem or shortcoming of GDP?

a)
Goods produced in one period that are sold in the following period fail to get counted in any period.

b)
It tends to understate the growth of economic welfare because it does not fully and accurately account for improvements in the quality of products.

c)
GDP is not an accurate measure of welfare because it makes no adjustment for harmful side effects (such as pollution) or destructive acts of nature.

d)
GDP understates output because it fails to include nonmarket production such as that which takes place in the household or in illegal markets.
C

by definition, nominal GDP measures current production using current prices whereas real GDP measures current production using base-year prices. If nominal GDP increases, it could be due to an increase in production. Additionally, if nominal GDP increases, it could be due to an increase in prices (inflation). There is no way to discern what the reason for the increase in nominal GDP is. Real GDP uses base year prices so all inflation increases are eliminated. When real GDP increases it is due solely to an increase in production.
In contrast with nominal GDP, real GDP refers to nominal GDP

a)
minus exports.

b)
minus personal income taxes.

c)
corrected for price changes.

d)
corrected for depreciation.
nominal GDP
measures current production using current prices. If nominal GDP increases, it could be due to an increase in production. Additionally, if nominal GDP increases, it could be due to an increase in prices (inflation). There is no way to discern what the reason for the increase is
Real GDP
measures current production using base-year prices. uses base year prices so all inflation increases are eliminated.. when it increases it is due solely to an increase in production.
D
by definition, GDP measures domestic production of a given country. The restaurant meals are purchases. Home cooked meals are part of nonmarket production so they are not included in GDP.
Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself, has

a)
reduced measured GDP.

b)
not affected measured GDP.

c)
increased measured GDP only to the extent that the value of the restaurant meals exceeded the value of meals previously cooked at home.

d)
increased measured GDP by the full value of the restaurant meals.
A

any decrease or decline in real GDP is known as a contraction (or contractionary phase) of the economy. Six months (or 2 consecutive quarters) of contraction in the economy is defined as a recession.
The period of declining growth in real GDP between the peak of the business cycle and the trough is called the

a)
contractionary phase.

b)
boom.

c)
expansionary phase.

d)
stationary phase.