Economics 102: Macroeconomics Ch 4. Measuring the Economy

The Circular Flow of Economic Activity

a model showing the basic economic relationships within a market economy

The Circular Flow Model

includes households, businesses, and governments

The Factors of Production

include land, labor, capital, and entrepreneurship

Economic Relationships

• households = buy goods and services from businesses in attempt to satisfy their unlimited needs and wants

• businesses = sell goods and services to households, earning revenue and generating profits. pay wages, interest, and profits to households in return for the use of their factors of production

• government = levy taxes on households and business in order to provide certain benefits to everyone

Injections & Leakages From the Circular Flow Model

• injections = investment, government purchases, exports

• leakages = savings, taxes, imports

• savings = leaks out to borrowers, and borrowers use the money to buy goods and services, which injects the money back into the circular flow

• government taxes = leak out of the circular flow model, and then government spending injects them back into the economy

Which of the following statements is true regarding the relationships in a market economy?

1. Households pay wages, rent, interest, and profits to business in exchange for their factors of production.

2. Government buys goods and services from households in exchange for taxes.

3. Governments pay wages, rent, interest, and profits to firms who buy physical capital from households.

4. Businesses pay wages, interest, and profits to households in exchange for use of their factors of production.

Businesses pay wages, interest, and profits to households in exchange for use of their factors of production.

When savings leaks out of the circular flow model, what happens to it?

1. It flows to the government.

2. Savings does not leak out of the circular flow model.

3. It shrinks the size of the economy.

4. It flows to borrowers who then inject it back into the economy.

It flows to borrowers who then inject it back into the economy.

What are the factors of production?

1. Land, labor, capital, and entrepreneurship.

2. Investments and capital.

3. Land, labor, and income.

4. Labor and investment.

Land, labor, capital, and entrepreneurship.

What does the circular flow model of the economy illustrate?

1. How fast the economy grew during the previous ten years.

2. The price of every product and service.

3. How households pay rent to the government.

4. The basic economic relationships in a market economy.

The basic economic relationships in a market economy.

Which of the following is an injection into the circular flow model?

1. Government taxes

2. Savings

3. Imports

4. Exports

Exports

GDP

Gross Domestic Product

• is the total market value of all final goods and services produced during a given time period within a nation’s borders

• it is equal to the total income of the nation’s households and also the total expenditures within the nation

The factors of production

include land, labor, capital, and entrepreneurship. each of these factors of production are exchanged for a corresponding source of income, which we call rent, wages, interest, and profit

Economic decision makers

within our economy, include households, firms, governments, and foreigners

income approach

measures the total income that is earned by all the households in a nation

expenditure approach

measures the total amount of spending on goods and services that are produced within the domestic borders of the nation

What are the two methods economists use to measure Gross Domestic Product (GDP)?

1. The income and expenditure approach.

2. The receipts and payments method.

3. The nominal and the actual methods.

4. The earnings and depreciation approach.

The income and expenditure approach.

Which of the following is true when using the income approach to measure GDP?

1. It measures total expenditures made by households in a nation.

2. It is the only reliable method economists use.

3. It only takes into account expenditures from previous years.

4. It measures total income earned by all households in a nation.

It measures total income earned by all households in a nation.

Which of the following statements is NOT true regarding the expenditure approach?

1. It measures the total income earned by households.

2. It measures the total spending on goods and services.

3. It yields the same results as the income approach.

4. It includes government purchases.

It measures the total income earned by households.

Which of the following is NOT a valid exchange medium for factors of production?

1. Imports

2. Rent

3. Wages

4. Profit

Imports

When economists estimate Gross Domestic Product using the income approach, which types of income are included?

1. Wages, interest, and taxes.

2. Profit, wages, interest, and land.

3. Rent, wages, interest, and profit.

4. Profit, depreciation, and interest.

Rent, wages, interest, and profit.

Gross Domestic Product (GDP)

• the official measure of the total output of goods and services in the U.S. economy

• the total market value of all final goods and services produced during a given time period within a nation’s domestic borders

The Formula for GDP

• GDP = C + I + G + (X-M)

• Gross Domestic Product = Consumption + Investment + Government Spending + (Exports - Imports)

Consumption

• represents all of the purchases of goods and services made by households

• accounts for the largest share of GDP and has averaged between 65% and 70% for many decades

Government Spending

federal, state, and local spending on things like national defense, social security, and the operational expenses of the government

Investment

the costs of building factories, regular business expenses, the construction of new homes as well as increases or decreases in business inventories

Exports

include goods and services that are produced within our borders but sold in other countries

Imports

include goods and services that are consumed within our country but produced in other countries

What does the word domestic in Gross Domestic Product refer to?

1. All goods and services that are produced in other nations and sold there.

2. The type of taxes the government levies on businesses.

3. The amount of depreciation claimed by firms in an economy.

4. All goods and services that are produced within a nation's domestic borders.

5. All goods and services that are produced outside a nation's borders.

All goods and services that are produced within a nation's domestic borders.

If you needed to increase the GDP, why might you focus on consumption to do this?

1. Consumption is the smallest part of GDP.

2. Consumption is the largest share.

3. Consumption is the fastest moving.

4. Consumption is the easiest to move.

5. Consumption is the only changeable component of GDP.

Consumption is the largest share.

Which of the following would NOT be included in consumption?

1. Welfare checks received

2. Consulting services purchased in a city across the country

3. Toothpaste purchased at a local store

4. Monthly rent and utilities

5. A new car purchase

Welfare checks received

Tommy's Tweezers has had a change in inventory, increasing by 100,000. What component of the GDP would this affect?

1. Investment

2. Imports

3. Exports

4. Households consumption

5. Depreciation

Investment

What is the GDP for the following information:

Consumption = 10,000

Investment = 2,000

Government spending = 1,000

Exports = 7,500

Imports = 7,000

1. 27,500

2. 25,500

3. 13,500

4. 20,000

5. 26,000

13,500

GDP (Gross Domestic Product)

• represents the total production of a nation within its domestic borders

• measures the total market value of all final goods and services produced within the domestic borders of nation

Final Goods

include anything that is purchased directly by consumers in the marketplace

Intermediate Good

if a good is used as an input to produce another good, it is considered an intermediate good

When calculating GDP, transfer payments are:

1. Included in imports.

2. Included in exports.

3. Not counted in the GDP.

4. Considered part of government spending.

5. Already counted as consumption by households.

Not counted in the GDP.

Which of the following scenarios would be included when calculating the GDP?

1. Jennifer purchases a lawnmower from her father.

2. Tracy helps clean up her cousin's house on the weekend.

3. Margie cleans her own house.

4. Margie buys a new set of sunglasses that were made in the US.

5. Megan resells a book she received as a gift to her sister.

Margie buys a new set of sunglasses that were made in the US.

Why would the revenue of a singer from the United States that held a concert abroad not included in the U.S. GDP?

1. It will only be calculated if the money is transferred to the U.S.

2. Services are not part of GDP.

3. Only inventory is part of GDP.

4. Entertainment is exempt from GDP.

5. The service happened outside of the U.S.

The service happened outside of the U.S.

Which of the following would be included in the GDP?

1. Transfer of payments.

2. Goods that are produced and sold illegally.

3. Sales of used goods.

4. Goods that are not 'final.'

5. Goods that are produced by foreign companies within the domestic borders of a nation.

Goods that are produced by foreign companies within the domestic borders of a nation.

Which is TRUE of the market value of an intermediate good?

1. It is the best way to measure demand in an economy.

2. It will not be counted in the GDP because it is not a final good.

3. It will be counted as depreciation expense.

4. It is included in the income approach to calculating GDP.

5. It will be counted in the GDP as a final good.

It will not be counted in the GDP because it is not a final good.

Investment

the value of all goods produced during a period for use in the production of other goods and services

Gross Private Domestic Investment

the value of all goods produced during a period for use in the production of other goods and services

What happens when a computer gets produced this year and distributed to a retail store's inventory?

1. It will be counted as consumption this year, regardless of whether or not it is sold.

2. This leads to an equal and offsetting purchase of stocks, bonds or mutual funds.

3. It would be considered an intermediate good.

4. It will be counted as an investment until it is sold.

5. It will not be counted in the GDP.

It will be counted as an investment until it is sold.

How is investment, in economics, related to spending?

1. It is more concerned with business spending than consumer spending.

2. It is more concerned with government spending than business spending.

3. It is more concerned with exports than consumer spending.

4. It is more concerned with consumer spending than business spending.

5. It is more concerned with the financial markets than with business spending.

It is more concerned with business spending than consumer spending.

Which of the following statements is NOT true regarding investment?

1. Savings is directly connected with investment in an economy.

2. Money that is saved gets loaned out to entrepreneurs who invest into the economy.

3. Investment refers to purchases of stocks, bonds, or mutual funds.

4. Investment is the value of all goods and services produced for use in the production of other goods.

5. Investment would include the manufacturing equipment that produces consumer goods.

Investment refers to purchases of stocks, bonds, or mutual funds.

What are the main categories of investment?

1. Financial investments made by consumers and business investments.

2. Business expenditures and new residential housing only.

3. Business expenditures, new residential housing, and changes in business inventories.

4. Stocks, bonds, and money market funds.

5. Business expenditures, and changes in inventories.

Business expenditures, new residential housing, and changes in business inventories.

In economics, the term investment refers to what?

1. Money that directly pays for social security.

2. Gross private domestic investment.

3. The return on a stock mutual fund.

4. Financial investments in stocks or bonds.

5. Money that is taken out of paychecks each month.

Gross private domestic investment.