EC 202 Exam #1 (Craig)

What does GDP stand for and what does it measure:

Gross Domestic Product, and it measures the total income of everyone in the country

Average prices are increasing. What is the term for this?

inflation

Average prices are decreasing. What is the term for this?

Deflation

Percentage of labor out of work. What is the term for this? -

unemployment

Retail sales is the total amount of what? -

spending in a store

What is a trade deficit? -

there is an imbalance of trade between the U.S and the rest of the world

As compared to microeconomics, how is macro different?

Micro focuses on the study of particular households, firms or markets while macro focuses on the studying of the ENTIRE economy.

Microeconomics is:

how individual households + firms interact in markets.

Macroeconomics is:

studying the economy as a whole with the goal of explaining certain changes that affect many households, firms, and markets.

Examples of questions that relate to macroeconomics:

Why are prices sometimes rapidly rising while other times they are stable?

How can the government promote low inflation rates?

Which is the single best measure of a society's economic health?

GDP

I want to see if the economy is doing good or bad. What should I look at? -

The accumulated income that everyone in the economy is earning

What 2 things can GDP measure at once?

Total income of everyone in an economy

Total spending on the goods and services produced

For an economy as a whole, income must equal _______.

expenditures

Why does income have to equal expenditures in an economy?

Every transaction has a buyer and a seller. Every $ spent by a buyer is a $ of income for a seller

If Maggie buys a $3 cookie, how much income does the seller earn?

$3

Because of Maggie purchasing a $3 cookie, is she contributing to GDP?

Yes, because expenses = income

Explain the Circular Flow Diagram:

Assume all goods and services are bought by households

Assume households spend all their income

The money goes in the market containing the goods and services

Firms use the money they receive from customers to pay their workers' wages, building rent, give firm owners profit, etc.

Total money spent buy households for goods + services = _______

total wage, rent, and profit

What does GDP mean in terms of markets?

Market value of all final goods and services produced within a country in a given period

How do prices showcase value?

it reflects the amount people are willing to pay for different goods.

An apple is twice the price of an orange. What does this mean?

An apple contributes twice as much to GDP as an orange.

The products included in the GDP must be:

produced in the economy and sold legally in markets.

Do housing servies count as GDP?

Yes!

Give an example of a time where net exports increase?

Maggie's jewelry company in the U.S sells jewelry to the Albanian Jewelry Hub.

Transfer payments alter _____ ______ but do not reflect the economy's production.

Household income

GDI

Total income in the economy

What is seasonal adjustment?

People spend more during holidays. We want to look past these seasonal changes in spending so we exclude seasonal cycles from GDP.

Are there any prior steps to take before presenting quarterly GDP as a final number?

The GDP must first be modified by seasonal adjustment.

I measure the GDP representing 3 months but I want to represent this data reflecting a whole year. What I do?

original GDP x 4 = annual value

There is no one way to calculate GDP. List the 2 ways to add up GDP.

1.) Add up total income

2.) Add up total expenditure

Describe Gross National Product:

The total income earned by the permanent residents of a nation. If Maggie moves to Canada just for the sole purpose of completing a temporary project, the work she does in the other country still counts as U.S.A's GDP.

Is Gross Domestic Income the same as GDP?

Basically, but statistical discrepancies cause the numbers to vary a lil.

Net National Product?

The total income of a nation's residents - depreciation losses (Maggie's truck is rusting)

National Income?

Basically the same as GNP, the numbers just change a lil cause of statistical discrepancies

Personal income?

Income that households and noncorp businesses recieve (excluding retained earnings, corporate income tax, and social security tax).

What is disposable income in maggie terms?

Maggie pays all her obligations to the government. All the money she has left after those payments are her disposable income.

If the price of a hot dog is $2 and the price of a burger is $4, then 30 hotdogs contribute as much to GDP as _____ burgers.

15

I have an American household. I purchased a $30,000 Swedish car for my wife. Does this count as a part of GDP and is this an export or import? -

The 30,000 counts as an increase in consumption, but there is a loss of net exports as this car is an import.

What makes up net exports? -

Goods and services produced abroad

Net export (formula)

Exports - Imports

I am a retired teacher receiving an unemployment insurance benefit. Does this count as government purchase? -

No, because you are receiving money without the exchange of you providing a good or service to the economy.

I am a school teacher and I recently received money from the government. Does this count as a government purchase? -

Yes, because I received money in exchange for the service I provided, which was educating children.

What do government purchases measure?

spending on goods and services by the local, federal, and state governments including the salaries of the government workers.

Maggie moves from NC to work in the UK. Maggie's production counts toward which country's GDP and why?

UK because it doesn't matter if maggie is from the U.S, if she is producing goods in the borders of UK then it is included in the GDP for that country.

Maggie sells her old car to kate. But why isn't this transaction included in GDP?

You can't include past/old things. Only current

Maggie buys a cake. What part of this purchase is included in GDP?

What you paid for the cake (expenditure)

Maggie churns butter. Instead of using butter for the cake, she puts it in story to sell it on a later date. Is the value of the cake included in GDP or not?

When it is in storage it is included but when its sold it is no longer included because reductions in inventory subtract from GDP.

Why does GDP only include the value of final goods?

because the value of the intermediate good is included in the price of the final good

What products does GDP exclude due to difficulty of measuring value?

- illegal items like drugs

- items that never make it to the marketplace and are produced and consumed in the same place (veggies in a garden at home)

Maggie purchases a home. Is this an investment or is this consumption?

investment

National Income Accounting :

accounting for the income of a country

Maggie wants to calculate GDP what does she quite literally have to do?

price x quantity over and over again for each final good produced, add it up, and this is GDP.

If I were to add the price x quantity of oranges and add the price x quantity of orange juice, the GDP of oranges would be counted twice. Why?

Because oranges within the orange juice are considered an intermediate good. You only use the GDP of a final good.

Describe transfer payments.

You give the government your tax money and the government gives it towards your grandma's social security.

You can think of GDP as

one of the measurements the doctor takes to measure if you're healthy. Like taking the Economy's temperature

If the economy's exports = imports, how much do we have in net exports?

0

What is the largest component of income?

wages + salaries

General definition of a recession:

When GDP falls for at least two quarters in a row

What is the largest component of expenditures?

consumption

Let's say I were to divide total government spending by GDP. Let's say I get a number like 39%. Well when I look at the pie chart why is it that only 17% of government spending is showing up?

It's because the other 12% is transfer payments, which are not included in GDP.

What is National Income Accounting?

The overall bookkeeping system in charge of measuring the health of the economy. GDP is a tool within this to measure the economy's state of being.

Expenditure components:

C + I + G + NX

C=

consumption (everyday expenditures like food, dog food, water, pencils)

I=

Investment! (Purchase a new company building, new computers, you buy a new home) (Overall equipment and housing)

G=

Government expenditures (The government spends money to repave roads)

What does it mean if net export balances are negative?

you imported more than you exported as a country

Income components:

- wages + salaries

- interest

- rental income

- profit

For income, what is the largest component of it?

wages + salaries

When GDP is expanding, the growth rate:

is positive and is called economic growth!

If the growth rate of GDP is negative, we call this:

a recession (imagine a pie chart getting smaller)

Can you list some problems with GDP?

- only measures market activity

-only measures legal activity

-doesn't consider costs of pollution or damage to the environment while producing a product

- does not account for the distibution of income or consumption

Who is known as the father of economics?

adam smith

What book did Adam Smith write?

An Inquiry into the Nature and Causes of the Wealth of Nations

The circular flow concept is:

an illustration of the idea that "One person's spending is another person's income". I bought a cookie for $1 and the seller received that $1. This dollar is an expenditure for the buyer and income for the seller.

The value of imports and exports are included in:

the international balance of payments (net exports)

This person is working, and someone pays that person for their work (i.e, paycheck). Now the government taxes that person. The money that person gives to the government will either be used to purchase goods or services for the economy like new roads.

Is this included in GDP?

Yes, because this money is given within a market.

There are changes in inflation and deflation. Is this change accounted for in GDP?

Nah

Why couldn't Adam Smith answer the question: What makes a nation state wealthy?

The concept of a nation state wasn't fully developed yet. However, based on this question in the 18th century, Simon Kuznets created NIPA in the 1930s to account for the wealth of a country.

International Circular Flow: (Example)

I work in the U.S and I buy a toy made in Canada, this shows circular flow between countries.

inventory is considered

investment spending

The GDP Deflator tells us if prices are _________ or _____________ and the ________ ______ tells us by how much.

increasing or decreasing ; inflation rate

Real GDP calculation helps us answer this question:

How much more or how much less are we producing?

Income GDP components=

wages + interest + rent + profit +other

Nominal GDP looks at which kinds of changes?

price and quantity changes

Maggie notices the total spending has been rising from year to year. What could be the 2 reasons behind this?

1.) the economy is producing a larger amount of goods

2.) goods + services are being sold at higher prices

What does Real GDP measure?

The total production of goods and services, independent from the price changes. It shows how production changes over time.

What is the hypothetical question that real GDP answers?

What would be the value of the goods and services produced this year if they were valued using prices from a former year?

Let's say for the year 2022 the price of hotdogs is $1, and 100 hotdogs are sold, likewise, the price of burgers are $2 and 50 burgers are sold.

What is the nominal gdp?

$200

Let's say for the year 2022 the price of hotdogs is $1, and 100 hotdogs are sold, likewise, the price of burgers are $2 and 50 burgers are sold.

Let's say for the year 2023 the price of hotdogs is $2 and 150 hot dogs are sold. The cost of burgers are $3 and 100 are sold.

What is the real gdp? (2022 is the base year)

$350

Let's say for the year 2022 the price of hotdogs is $1, and 100 hotdogs are sold, likewise, the price of burgers are $2 and 50 burgers are sold.

Let's say for the year 2023 the price of hotdogs is $2 and 150 hot dogs are sold. The cost of burgers are $3 and 100 are sold.

What is the GDP Deflator for 2023?

171

What does I in the GDP formula stand for?

Investment, when a business buys a building or equipment to produce more goods and services in the future

Maggie wants to buy a new house! Is this consumption or investment?

investment

Why do we subtract imports from exports in GDP?

Because those goods imported were not produced in the U.S

Per Capita GDP

(Per - person GDP)

Why does Real GDP only reflect the quantities produced?

It hold the prices constant from the base year. (Ex: I want to measure the quantities produced for 2023. I am still going to use the 2022 prices.)

GDP Deflator formula?:

Nominal GDP

--------------- x 100

Real GDP

What does GDP deflator reflect?

the prices of all goods and services produced in a country

Are Nominal GDP and Real GDP the same?

They must be the same in the base year, which makes the GDP deflator for the base year always = 100

What does the GDP Deflator compare?

Measures the current prices as compared to the prices of the base year used.