AP Macro 2.1-2.3 Quiz

What are the national income and product accounts? What are they also known as?

They keep track of the spending of consumers, sales of producers, business investment spending, government purchases, and a variety of other flows of money among the different sectors of economy

Also known as national accounts

In the United States, the national income and product accounts are calculated by the ________, a division of the U.S government’s __________

Bureau of Economic Analysis, Department of Commerce

What is the circular flow diagram?

Simplified representation of the macroeconomy

Shows flow of money, goods and services, and factors of production through the economy

Allow us to visualize the key concepts of national accounts

What is the key principle behind a circular flow diagram?

The flow of money into each market or sector is equal to the flow of money coming out of that market or sector

The circular flow diagram is divided into two flows which are ____ and ____?

1. physical things like good, services, labor, or raw materials in one direction

2. Payments for those things in the opposite direction

What are product markets?

where goods and services are brought and sold

households buy goods and services from firms

Consumer spending

Household payments for goods and services

Factor markets

Firms buy/make factor payments to the factors of productions (resources) especially capital and labor, needed to produce goods and services which are sold by households

Households _____ factors of production and receive _____ from them

own, income

Where do households derive the majority of their income?

wages earned by selling in the labor market

The government injects funds into the circular flow through ___________ and funds leak out of the circular flow through ______

government spending, taxing

What is government spending?

total expenditures on goods and services by federal, state, and local governments

eg. national military and public school funding

What are taxes?

Payments that firms and households are required to make to the government

used to finance much of government spending

What is tax revenue

funds government receives from taxes

How is revenue allocated by firms?

firms must use some of their revenue made through consumer and government spending from the product market on paying taxes

The remaining funds are then allocated to pay wages, rent, interest, and profits to households through factor market

How do consumers allocate their income?

Households pay taxes to the government

The reaminder of their income is spent on consumer spending

Disposible income

Total amount of household income available to spend on consumption

equal to income plus government transfers minus taxes

What are government transfers?

payments government makes to households and firms without expecting a good or service in return

eg. unemployment insurance payments

T/F Governments provide goods, services, and transfers to households and firms

true

How is disposible income that is not spent on goods and services shown in the circular flow?

a flow into and out of financial markets

What is a leakage in circular flow?

A leakage means money leaving the main spending flow between households and firms.

What is an injection in circular flow?

injection means money entering the circular flow that increases overall spending.

Private spending

equal to disposible income minus consumer spending

household’s disposable income not spent on consumption

is a leakage in circular flow

Where are private savings usually held?

in financial institutions (link banks)

inject it back into circular flow in the form of loans

Where do financial markets channel private savings into?

government borrowing and investment spending

What is government borrowing?

government has to borrow funds to pay for government spending not covered by tax revenue

What is investment spending?

firms need to borrow funds to finance investment spending

investment spending is spending by firms on new productive physical capital such as machinery and capital and on changes in inventory

What are inventories?

goods/raw materials firms hold to facilitate their operations

Why are increases in inventory of finished goods and services counted as investment spending?

they influence ability of a firm to make future sales

T/F Investment spending also includes spending on construction of any structure, like a new house. Defend answer

True

Construction produces stream of output (eg. for house, housing services for occupants)

Exports

goods and services sold to other countries

Payments for exports lead to _______ of funds from rest of world

injection

Imports

Goods and services purchased from other countries

Purchases of imports lead to _______ of funds into circular flow

leakage

How can foreigners participate in U.S financial market?

• Foreign lending: lending by foreigners to U.S borrowers

• Foreign borrowing: lending by U.S lenders to foreign borrowers

What is Gross Domestic Product? What is it’s abbreviation?

GDP

measure of the final output in an economy

equal to total value of all final goods and services produced in an economy during a given period (usually a year)

What is the difference between nominal GDP and real GDP?

nominal GDP is the actual calculated value for GDP

real GDP is nominal GDP adjusted for changes in price

What is aggregate spending?

total amount of money spent in an economy on goods and services over a specific period of time.

What is the expenditure approach?

adds up aggregate spending on domestically produced final goods and services in the economy

Formula for expenditure approach?

C+G+I+(X-M)

Consumer spending + Gov + Investment + net exports (X-M)

What is the income approach?

adds up total factor income earned by households from firms in the economy

includes rent, profit, interest, wages

Value-added approach

calculates GDP by surveying firms and adding up their individual contributions to the value of each final good and service

t/f all three approaches to calculating gdp may lead to different results

false

What are final goods and services?

goods and services sold to the final or end, us

What are intermediate goods and services?

goods and services brought from one firm by another firm to be used as inputs into the production of final goods and services

What is the difference between considering intermediate goods and services and considering investment spending when calculating GDP

intermediate goods and services shouldn’t be considered because they’re just used in production

Investment spending should be considered because they’re used for a long time and aren’t closedly linked to current production

What are the 4 groups that purchase goods and services in an economy?

households, firms, government, foreigners

Why do we subtract imports when calculating GDP

it leaks out of national borders to firms outside country

Net exports

difference between value of imports and value of imports, denoted as (X-M)

Formula for income approach?

rent + wages + profits + interest

What is the value added by a producer?

the value of its sales minus the value of its purchases of inputs

Which of the following is not a flow represented in the circular flow diagram?

a. prices and employment

b. taxes and government spending

c. income and expenditures

d. factors of production and factor payments

e. saving and lending

a

Which of the following components makes up the largest percentage of GDP measured by aggregate spending?

A. Consumer spending
B. Investment spending
C. Government purchases of goods and services
D. Exports
E. Imports

A

What are some things not included in GDP?

• Used and Second-hand products

• Purely financial transactions (eg. gov transfers and stock, bond transactions).

• Services provided for no payment

• Inputs/intermediate goods and services

What is gross private domestic investment?

• Machinery, equipment, tools

• Construction

• Pos/neg changes in inventory

• Creation of new capital assets

• Non investment transactions are excluded (eg. like stocks/bonds)

• Subtract depreciation costs

What are Depreciation costs?

Depreciation costs are the portion of a capital asset’s value that is considered “used up” or lost over time due to wear and tear, aging, or obsolescence. They are subtracted from gross investment to calculate net investment, showing the actual increase in productive capacity.

What is net investment calculated as?

gross investment - depreciation costs

Gross domestic product is equal to which of the following?

A

Total consumer spending on final goods

B

The total value of production of all firms

C

The sum of income paid to all the factors of production

D

The total value of production of domestic firms

E

The sum of values added of all foreign firms located domestically

C

If an automobile was manufactured in 2006 and sold to a consumer in 2007, what was the effect on gross domestic product in 2006 and 2007?

2006: increase

2007: no change

Is GDP calculated with gross investment or net investment?

gross investment

Why were national accounts created?

• During Great Depression barely no way to measure economic performance

• commissioned Simon Kuzniers to develop set of national income accounts

• They had to identify what they wanted to prioritize with economicp performance which led to emphasis on production and capcity of economy to produce

Why does GDP has limitations as a more general measure of economic performance?

mainly emphasizes information about production in the economy

What are some items not included in GDP because including them would lead to an overestimate of production in the economy?

Including these items would lead to some double counting and values that do not represent domestic production:

• intermediate goods: leads to overcounting since included in final goods

• used goods: already accounted for the first time

• financial assets (stocks and bonds): don’t represent production/sales of final goods and services

• transfer payments: transfer of funds but there’s no good or service in return

• goods/services produced in other countries: not produced domestically

What is a bond?

a promise to repay with interest

What is a stock?

ownership in a company

What are non-market transactions?

goods and services not brought and sold in a legal market

What are some items not included in GDP leading to an underestimate of production in the economy?

Nonmarket production:

• bartered (traded) goods and services: no market transaction also took place

• home production (activities like home maintence and family care in the household): not paid for so not included in gdp

• transactions in underground economy: not bought and sold in a legal market

What exactly can GDP tell us?

tells us the size of an economy providing us a scale to compare with other years/countries

Why is it important to be careful when drawing conclusions from GDP numbers (think time and population)

time: When comparing the increase of GDP over time, it also in part includes the increases in the prices of goods and services instead of just solely output. Thus, prices should be held constant to make comparisons in production over time

population: When comparing countries with different population sizes, its important to also adjust for the number of people sharing output produced in the economy

GDP measures changes in which of the following over time?

A. Leisure time
B. Environmental quality
C. Distribution of goods
D. Harmful effects of production and consumption
E. Increases in output and prices

E

Of the three things listed below, highlight everything that is included in U.S. GDP.

a. You mow your family’s lawn.

b. You pay the neighbor’s kid in cash to mow the lawn.

c. You hire a landscaping company to mow the lawn.

j c

a. is househould and b is informal/off the books

Is this included in GDP: You buy delicious homemade chocolate chip cookies from the school bake sale.

nah, its off the books

t/f unemployment rate widely fluctuates over time

true

How is employment defined?

employed people are currently holding a job in the economy, either full time or part time

What conditions must you follow to be considered as unemployed?

individuals who aren’t currently employed, are actively looking for work, and available for work

t/f you’re only considered unemployed if you follow the other conditions and have been actively seeking for a job during the past 4 weeks

true

What is labor force defined as?

the sum of the employed and unemployed

includes all people willing and able to work

What is the labor force participation rate?

percentage of working age population (age 16+ in U.S) that are in the labor force

Labor force participate rate formula

Labor force/Population age 16 and older * 100%

Unemployment rate

percentage of the total number of people in the labor force who are unemployed

Unemployment rate formula

num unemployed workers/labor force * 100

How is unemployment rate estimated in U.S?

The U.S Census Bureau carries out a monthly surevey called Current Population Survey whiich surveys 60000 families and asks if they’re unemployed and if they’ve actively been looking for work which is an estimate of the total population

What is the employment rate a good indicator of?

how easy or difficult it is to find a job given the current state of the economy

t/f during recessions easier to find work

false, unemployment rate increases

What are some limitations of the unemployment rate?

not everyone who would like to work but isn’t working will be counted as unemployed..

• discouraged workers not included which leads to an understatement of the percentage of people who want to work but are unable to find jobs

• underemployed also not included leading to an understatement of the percentage of the level of joblessness in the economy

Discouraged workers

are nonworking people who are capable of working but have given up looking for a job due to the state of the job market

Underemployed

workers who would like to work more hours or who are overqualified for their jobs

What does the Bureau of Labor Statistics (BLS) do?

calculates official unemployment rate

also calculates broader measures of labor underutilization (eg. unemployment plus discouraged workers)

What is the BLS’s broadest measure of unemployment and underemployment?

U6: sum of all undercounted workers plus unemployed

When does the unemployment rate indicate a larger issue with unemployment than actually exists in the economy?

• People usually take a few weeks to find a job. However, a worker confident of finding a job but have not yet accepted a position is still considered unemployed. Thus unemployment rate never falls to 0 even if jobs are plentiful

• people may indicate that they’re willing and able to work even if they’re not willing to receive unemployment benefits leading to an overstatement of unemployment rate

T/F Unemployment rate varies greatly among demographic groups. Why?

True, easier to find job when experienced and of prime working age (25-54)

Prove that GDP and unemployment move in opposite directions?

more production means more workers hired and less production means fewer workers hired

What are the three types of unemployment?

frictional, structural, and cyclical

But what is frictional unemployment?

unemployment due to time workers spend in job search 

eg. looking for new job after quitting or trying to find their best option

Workers moving from job to job and new workers entering the workforce contribute to frictional unemployment.

Why does frictional unemployment always have a certain amount?

1. constant process of job creation and destruction

2. new workers always entering job market

Can frictional unemployment ever be a good thing?

yes a limited amount tells us the economy is actually productive since workers are finding jobs that are well matched to their skills and workers unemployd for a brief period while searching for right job don’t experience too much hardship

In periods of higher unemployment, ______ share of unemployment is frictional

smaller

How does public policy aimed to help workers who lost their job sometimes contribute to frictional unemployment

Generous unemployment benefits reduce incentive to quickly find a new job leading to more frictional unemployment since people are searching for jobs for longer.

What is structural unemployment?

Unemployment that results when workers lack skills required for available jobs, or there are more people seeking jobs in a labor market than their are jobs available at the current wage rate

indicates a mismatch between supply and demand in labor markets

What are the causes of structural unemployment?

• a mismatch between workers’ skills and job requirements

• technological change and automation

• geographic migration of people or jobs

• minimum wages