ECON: Measuring Output and Income
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Questions and Answers

What are imports?

  • Goods, services, or resources produced abroad and sold domestically (correct)
  • Goods produced in the same country
  • Goods that are not counted in nominal GDP (correct)
  • Goods produced domestically and sold abroad

    • What constitutes savings?

    Money in the bank or a stock or bond.

    What signifies investment?

    Buying a house or expanding a factory.

    What are government purchases?

    <p>Final goods purchased by governments such as military equipment and salaries of government employees.</p> Signup and view all the answers

    What are transfer payments?

    <p>Unemployment payments.</p> Signup and view all the answers

    When measuring GDP, we classify expenditures into four categories: ___, government purchases, net exports, gross investment.

    <p>Consumption</p> Signup and view all the answers

    What is gross investment?

    <p>The dollar value of all new capital purchased and the expansion of inventories.</p> Signup and view all the answers

    What is net investment?

    <p>The difference between gross investment and depreciation.</p> Signup and view all the answers

    What is depreciation?

    <p>The consumption of physical capital or the value of capital that wears out or becomes obsolete.</p> Signup and view all the answers

    What are exports?

    <p>Goods, services, or resources produced domestically and sold abroad.</p> Signup and view all the answers

    What are imports?

    <p>Goods, services, or resources produced abroad and sold domestically.</p> Signup and view all the answers

    What are net imports?

    <p>The difference between exports and imports.</p> Signup and view all the answers

    What is nominal gross domestic product (GDP)?

    <p>A measure of GDP valued at current-year prices.</p> Signup and view all the answers

    What is the expenditures approach in calculating GDP?

    <p>An approach that sums categories of expenditures on final goods and services.</p> Signup and view all the answers

    What is included in consumption?

    <p>Durable goods, non-durable goods, and services.</p> Signup and view all the answers

    What should only be included in the estimation of nominal GDP?

    <p>Only final goods and services.</p> Signup and view all the answers

    What is an intermediate good?

    <p>A good used to build or make another product.</p> Signup and view all the answers

    What is the significance of saving?

    <p>Occurs when households or firms reserve income for future returns.</p> Signup and view all the answers

    What does labor compensation consist of?

    <p>Rent, wages, interest, profits and losses.</p> Signup and view all the answers

    Consumption includes durable goods, non-durable goods, and services.

    <p>True</p> Signup and view all the answers

    GDP is a perfect way to measure economic activity.

    <p>False</p> Signup and view all the answers

    When do two countries increase production and consumption?

    <p>When they specialize in goods for which they have a comparative advantage.</p> Signup and view all the answers

    What denotes the underground economy?

    <p>Economic activity not counted in GDP.</p> Signup and view all the answers

    More imports imply what?

    <p>More competition from foreign firms.</p> Signup and view all the answers

    Exports generally exceeded imports before 1975.

    <p>True</p> Signup and view all the answers

    How is real GDP adjusted?

    <p>Adjusted for inflation.</p> Signup and view all the answers

    What indicates a measure of GDP?

    <p>The dollar value of all final goods and services produced in a country.</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Real GDP = Adjusted for inflation Nominal GDP = Measure at current prices Net Exports = Exports minus imports Depreciation = Value of capital that wears out</p> Signup and view all the answers

    How does the U.S. economy significantly change since the Great Recession?

    <p>There has been a significant decline in the labor force.</p> Signup and view all the answers

    What does the GDP Price Index measure?

    <p>Nominal GDP divided by Real GDP multiplied by 100.</p> Signup and view all the answers

    What is a significant economic measure in developing countries?

    <p>GDP often underestimates actual production.</p> Signup and view all the answers

    What does circular flow model demonstrate?

    <p>It shows that both approaches to GDP calculation yield the same result.</p> Signup and view all the answers

    Real GDP measures the dollar value, adjusted for ___ , of all final goods and services produced.

    <p>inflation</p> Signup and view all the answers

    Study Notes

    Key Concepts in Measuring Output and Income

    • Imports: Represent approximately one-sixth of nominal GDP and are excluded from GDP calculations as they originate from foreign production.

    • Savings: Refers to money held in financial accounts, including stocks and bonds, as a reserve for future use.

    • Investment: Involves capital expenditures like purchasing a home or expanding a factory; characterized by high volatility and can fluctuate between positive, negative, or zero.

    • Government Purchases: Include expenditures on final goods and services by government entities, such as defense equipment and public employee salaries. Private sector salaries are excluded from GDP.

    • Transfer Payments: Non-exchange payments such as unemployment benefits that do not count towards GDP.

    • Expenditure Classification: GDP expenditures are categorized into consumption, government purchases, net exports, and gross investment, providing insight into consumption patterns.

    • Gross Investment: Measures total new capital purchases and inventory expansions; classified into business fixed investment, residential investment, and inventory investment—indicative of future productive capacity.

    • Net Investment: Calculated as gross investment minus depreciation, indicating changes in capital stock; positive net investment suggests growth in a country’s capital stock.

    • Depreciation: Accounts for the wear and tear of physical capital over time; depresses total value based on capital loss rates.

    • Exports (X): Goods and services produced domestically and sold internationally.

    • Imports (M): Goods and services produced abroad and purchased domestically.

    • Net Exports (NX): Calculated as exports minus imports; reflects a nation's trade balance and its impact on GDP.

    • Nominal GDP: Measures the economy's dollar output at current prices, including all final goods and services produced within a specified timeframe.

    • Expenditures Approach: A method for calculating nominal GDP by summing expenditures across four categories: consumption (C), gross investment (I), government purchases (G), and net exports (NX).

    • Consumption (C): Comprises all household spending on goods and services over a specific period, including durable goods, non-durable goods, and services.

    • National Income: Sum of rents, wages, interests, and profits; closely tied to production factors like capital and labor.

    • Labor Compensation: Traditionally represents around two-thirds of total income, indicating the significant role of wages in the economy.

    • Income Approach: Measures GDP based on income generated by final goods and services, indicating who earns what in the economy.

    • Real GDP: A measure that adjusts for inflation, comparing output over time; important for understanding economic wellbeing and production dynamics.

    • GDP Price Index (GDP Deflator): Compares nominal to real GDP to track price changes across years.

    • Circular Flow Model: Demonstrates that both the income and expenditure approaches to calculating nominal GDP should yield identical results.

    • Economic Limitations of GDP: GDP does not account for non-market transactions, leisure time, resource depletion, or product quality changes, presenting a partial view of economic activity.

    • Home Production: Goods and services created within households that aren't sold in markets, often excluded from GDP.

    • Underground Economy: Encompasses economic activities that evade official measurement, including illegal transactions, affecting accurate GDP assessment.

    • International Trade Dynamics: Increased imports may boost competition from foreign entities. Historically, U.S. imports outpaced exports after 1975.

    • Impacts of Economic Recession: The Great Recession led to declines in labor force participation; contributory factors include informal economy growth and retiring workers.

    • Informal Markets in Developing Countries: Often result in GDP underestimation due to substantial off-the-books economic activities.

    • Capital Relationships: More available capital typically correlates with higher productivity in a nation, emphasizing the importance of investment in economic growth.

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    Test your knowledge on key economic terms related to output and income through these flashcards. This quiz covers important concepts such as imports, savings, and investments, and their impact on GDP. Perfect for students looking to review foundational economic principles.

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