Econ Exam 1 Flashcards

Questions and Answers

In which category would cars made by Honda in Marysville, Ohio be counted if sold exclusively in the United States?

U.S. GDP

Choose the multiple choice answers which, when strung together, create an accurate definition of GDP. The U.S. Nominal Gross Domestic Product is:

All final goods and services... (correct)

Within the territorial boundaries of the United States... (correct)

Legally produced (correct)

Valued at the prices at which the goods or services sold (correct)

Classify the following goods according to whether or not they would be included in calculating the GDP for the United States.

GM's assembly and sale of cars in Mexico

Honda assembly and sale of cars in the U.S. (correct)

Sales of wheat to Mrs. Baird's Bakery

Ocean Spray purchases plastic to make bottles

Match the following categories with the respective items.

Consumption = Ice cream Investment = A domestically manufactured business computer Government = A public school teacher Net Exports = An exported doll house Signup and view all the answers

Which transactions are included in gross domestic product?

All sales except social security checks. Signup and view all the answers

What is considered double counting in the calculation of GDP?

Wheels used to produce a skateboard that will be sold new. Signup and view all the answers

Given the provided information, calculate Pakistan's GDP.

12.78 Signup and view all the answers

What is the difference between real and nominal gross domestic product (GDP)?

Nominal GDP is measured in current dollars while real GDP is adjusted for inflation. Signup and view all the answers

Label each description according to whether it refers to nominal GDP or real GDP.

A measure of an economy's output using current prices. = Nominal GDP A measure of an economy's output using constant prices. = Real GDP A measure of output that is adjusted for inflation. = Real GDP A measure of output that is not adjusted for inflation. = Nominal GDP Signup and view all the answers

In what way does GDP not give an accurate representation of standard of living?

GDP does not account for distribution of time between work and leisure, environmental quality, or non-market production. Signup and view all the answers

Please sort the items based on their effects on GDP and standard of living.

Workers work less but produce the same amount Signup and view all the answers

What does the data suggest about the relationship between GDP and child mortality rates?

Wealthier countries have lower mortality rates. Signup and view all the answers

What is the correct definition of inflation?

A general and ongoing rise in the average level of prices in an economy. Signup and view all the answers

Why is a hypothetical 'basket' of goods used to measure inflation?

It allows consumers to see general price increases over time. Signup and view all the answers

Determine if each statement is True or False.

The substitution bias causes the CPI to understate the cost of living. Signup and view all the answers

In the context of inflation, what best describes substitution bias?

It doesn’t account for consumers switching to alternative goods when prices rise. Signup and view all the answers

What is commodity substitution bias?

Households switching to an alternative good due to the price increase. Signup and view all the answers

What is unmeasured quality change?

The price of a high definition television remaining unchanged while its value increases due to improvements. Signup and view all the answers

What does the introduction of new goods do to the economy?

It increases the variety of products available and enhances the value of a dollar. Signup and view all the answers

Study Notes

U.S. GDP Overview

GDP includes all final goods and services produced within the U.S. territory during a specified period.
Goods produced by foreign companies, like Honda, are counted in GDP if sold domestically.

Gross Domestic Product Definition

U.S. Nominal GDP measures final goods and services that are legally produced within U.S. boundaries.
It reflects market prices at the time of sale, ensuring accurate economic analysis.

Goods Classification for GDP

Included in GDP: Cars assembled and sold in the U.S., mannequins purchased by retailers.
Not included: Sales of wheat to a bakery, resale of used textbooks, assembly of cars in another country, and purchases for production.

GDP Components

Consumption: Personal expenditures on goods and services, e.g., food, electronics, transport fares.
Investment: Expenditures on capital goods that will be used for future production.
Government spending: Salaries of public sector workers and public services.
Net Exports: The value of exports minus imports, reflecting trade balance.

Excluded Transactions from GDP

Social security checks are transfers and do not represent economic production.

Double Counting in GDP

Avoid including intermediate goods, such as wheels for skateboards in the GDP calculation.
Final products and services sold are included, unlike transactions like ticket resales.

Calculating GDP

Formula: GDP = C + I + G + (X - M).
For Pakistan: C = 9.80, I = 1.20, G = 3.20, X = 1.26, M = 2.68, resulting in GDP = 12.78.

Nominal vs. Real GDP

Nominal GDP reflects the value of output using current prices, while real GDP adjusts for inflation using base year prices.

Distinguishing GDP Types

Nominal GDP: Current prices considered.
Real GDP: Constant prices to account for inflation effects.

GDP Limitations and Living Standards

GDP fails to measure how labor is distributed between work and leisure.
Environmental quality changes and non-market production are not reflected in GDP figures.

Changes Impacting GDP and Living Standards

Improvements in technology or education quality can signal GDP growth and better living standards.
Formalizing unpaid work into GDP may increase GDP without enhancing living standards.

Economic Data on Child Mortality and GDP

Wealthier nations show lower child mortality rates, indicating higher socioeconomic conditions.

Inflation Definition

Inflation is a persistent rise in the average price level across an economy.

Measuring Inflation with a "Basket" of Goods

The basket helps track price increases consumers experience over time.

True and False Statements on Cost of Living

True: Quality changes can create distortions in cost of living adjustments.
False: CPI inaccuracies can overstate or understate actual inflation effects on living standards.

Substitution Bias Explained

Evaluating fixed baskets does not reflect consumer behavior shifts in response to price changes.

Commodity Substitution Bias

Consumers may switch to alternative goods as prices rise, impacting perceived cost of living.

Unmeasured Quality Changes

Advances in product technology may enhance value while price remains constant.

Introduction of New Goods

Increased product variety enhances consumer choices, potentially raising the dollar's value through competition.

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Description

Test your knowledge on U.S. GDP and its components with these flashcards. This quiz covers definitions and key concepts essential for understanding Gross Domestic Product, including examples specific to the U.S. economy. Perfect for exam preparation!