Chapter 8

What is microeconomics?

The study of how

households and firms make choices,

how they interact in markets, and

how the government attempts to

influence their choices

What is macroeconomics?

The study of the

economy as a whole, including topics

such as inflation, unemployment, and

economic growth.

What is the business cycle?

Alternating periods

of economic expansion and economic

recession

what do they mean by expansion?

The period of a business

cycle during which total production

and total employment are increasing.

what do we mean by recession?

The period of a business

cycle during which total production

and total employment are decreasing

what is economic growth?

The ability of

an economy to produce increasing

quantities of goods and services

what does macroeconomics analyze?

both what determines a country's rate of economic

growth and the reasons growth rates differ so greatly across countries

what is an inflation rate?

The percentage

increase in the price level from one

year to the next.

how does macroeconomic analysis help out?

helps consumers, firms, and policy-makers understand current economic conditions and predict future conditions

What is Gross Domestic Product (GDP)?

The market value of all final goods and services produced in a country during a period of time,

typically one year.

in the U.S., who compiles the data to calculate GDP?

Bureau of Economic Analysis (BEA)

GDP is measured using __________ ______, not quantities

market values

GDP includes only the market value of _________ _____

final goods

what is a final good or service?

a good or serviced purchased by a final user

what is an intermediate good or service?

A good or service that is an input into

another good or service, such as a tire

on a truck

is this a final good: a hamburger purchased by a customer

yes

is this an intermediate good: GM purchasing a tire from Goodyear for their trucks

yes

what is double counting?

Counting item twice for GDP (economics only count the final good like a pizza, not all the individual ingredients)

true or false: GDP does not include the value of used goods

true

true or false: a Tesla produced in China and sent to the U.S. counts in the U.S. GDP

false

GDP equation?

Y = C + I + G + NX

GDP = consumption + investment + government purchases + net exports

what does the circular-flow diagram illustrate?

the flow of spending and money in the economy

what are the three groups firms sell goods to?

domestic households, foreign households, and the government

what are exports?

expenditures by foreign households on domestically produced goods and services

what do we mean by firms use the factors of production?

labor, capital, natural resources and entrepreneurial ability to produce goods and services

what are the four categories we divide income into?

wages, interest, rent, and profit

What is profit?

the income that remains after a firm has page wages, interest and rent

what are transfer payments?

Payments by the

government to households for which the government does not receive a new good or service in return

are transfer payments included in GDP?

no

what are imports?

foreign-produced goods and services

what is the financial system?

the system that allows the transfer of money between savers and borrowers

what are the components of GDP?

consumption, investment, government purchases, and net exports

what is consumption?

Spending by

households on goods and services,

not including spending on new

houses

what are the three categories that make up consumption expenditures?

services (medical care, education, haircuts), nondurable goods (food, clothing), and durable goods (automobiles, furniture)

What is investment?

Spending by firms on new factories, office buildings,

machinery, and additions to

inventories, plus spending by

households and firms on new houses

what are the three categories investment is divided into?

business fixed investment, residential investment, changes in business inventories

what do economists mean when they use the word investment?

economists reserve the word investment for purchases of machin-ery, factories, and houses

what are government purchases?

Spending by federal, state, and local

governments on goods and services

what are net exports?

exports minus imports

true or false: we add exports

to our other categories of expenditures because otherwise we would not be including all spending on new goods and services produced in the United States

true

why are net exports negative?

because imports are greater than exports

What is value added?

the market value a firm adds to a product

when the BEA calculates GDP, what two types of production does it not include?

production in the home and production in the underground economy

what do we mean by household production?

refers to goods and services people produce for themselves

what is the underground economy (or shadow economy)?

Buying and

selling of goods and services that is concealed from the government to

avoid taxes or regulations or because

the goods and services are illegal

why do individuals and firms hide what they buy and sell?

1) They are dealing in illegal goods and services, such as drugs or prostitution; (2) they

want to avoid paying taxes on the income they earn; or (3) they want to avoid govern-ment regulations

what is the estimated size of the underground economy in the U.S. when measuring GDP?

10%

true or false: The underground economy in some low-income countries, such as

Zimbabwe or Bolivia, may be more than 50 percent of measured GDP

true

what three countries have the largest underground economies?

Bolivia, georgia, and Nigeria

what three countries have the smallest underground economies?

Austria, United States, and Switzerland

what is the underground economy also referred to as?

informal sector

how is GDP per capital calculated?

by dividing the value of

GDP for a country by the country's population

true or false: If Americans still worked 60-hour weeks, GDP would be much higher than it is

now, but the well-being of a typical person would be lower because less time would be

available for leisure activities

true

is GDP adjusted for pollution or other negative effects of production?

no

According to the World Health Organization, the 50 most polluted cities

in the world are in ____________ countries

developing

An __________ in crime reduces well-being but may actually _______ GDP if

it leads to greater spending on police, security guards, and alarm systems

increase; increase

is GDP adjusted for changes in crime and other social problems?

no

true or false: GDP measures how the pie is divided

false

What is nominal GDP?

the value of final goods and services evaluated at current-year prices

what is real GDP?

the value of final goods and services evaluated at base-year prices

The further away in

time the current year is from the base year, the _____ the problem becomes

worse

to make the calculation of real GDP more accurate, in 1996, the BEA switched to using....

chain-weighted prices

Holding prices constant means that the ________ ________ of a dollar remains the same

from one year to the next

purchasing power

true or false: real GDP holds prices constant

true

what is the price level?

a measure of the average prices of goods and services in the economy

how do we calculate the GDP deflator?

Nominal GDP/Real GDP x 100

by how much did the price level increase between 2021 and 2022?

7.1%

what is national income accounting?

refers to the methods the BEA uses to track total production and

total income in the economy

What is Gross National Product (GNP)?

is the value of final goods and services produced

by residents of the United States, even if the production takes place outside the United

States

What is depreciation?

The amount by which machinery, equipment, and

buildings decrease in value

In the NIPA tables, depreciation is called what?

the consumption of fixed capital

what is personal income?

Income received by households; includes transfer payments, but excludes firms' retained earnings

what is disposable personal income?

income remaining for people to spend or save after all taxes have been paid

what is gross domestic income?

GDP calculated as the sum

of income payments to households is sometimes

what are wages?

include all compensation received by employees, including fringe benefits such as health insurance

what is interest?

is net interest received by households, or the difference between the interest received on savings accounts, government bonds, and other investments and the interest

paid on car loans, home mortgages, and other debts

rent is received by who?

households

profits includes what?

the profits of sole proprietorships, which are usually small businesses, and the profits of corporations