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Questions and Answers
What is the effect of including intermediate goods and services in GDP?
What is the effect of including intermediate goods and services in GDP?
- The GDP would be understated.
- Nominal GDP would be lower than real GDP.
- The GDP would be overstated. (correct)
- The GDP would need to be adjusted for inflation.
Which of the following is classified as a final good or service?
Which of the following is classified as a final good or service?
- Fertilizer purchased by a farm supplier.
- Windows purchased by a manufacturing plant.
- A haircut purchased by a father for his son. (correct)
- Diesel fuel bought for a delivery truck.
What value is added by the manufacturer for each stereo speaker if components worth $40 are used and the speaker sells for $70?
What value is added by the manufacturer for each stereo speaker if components worth $40 are used and the speaker sells for $70?
- $30 (correct)
- $110
- $40
- $70
What is the net domestic product for the economy?
What is the net domestic product for the economy?
What is the national income for the economy?
What is the national income for the economy?
Why are activities like growing fruits and vegetables for home consumption excluded from GDP?
Why are activities like growing fruits and vegetables for home consumption excluded from GDP?
What is the correct value for disposable income?
What is the correct value for disposable income?
What defines final goods and services in the context of GDP?
What defines final goods and services in the context of GDP?
Which of the following best defines national income?
Which of the following best defines national income?
What is the implication if GDP is measured with intermediate goods included?
What is the implication if GDP is measured with intermediate goods included?
What does the term 'value added' refer to in the production process?
What does the term 'value added' refer to in the production process?
What is the gross domestic product for the economy?
What is the gross domestic product for the economy?
What is the value of net domestic product for the economy?
What is the value of net domestic product for the economy?
Which situation would lead to GDP being understated?
Which situation would lead to GDP being understated?
How do taxes on production and imports affect national income?
How do taxes on production and imports affect national income?
Which component is critical for determining disposable income?
Which component is critical for determining disposable income?
What is the total contribution to GDP of the transactions involving Arthur, Bob, Camille, and Donita?
What is the total contribution to GDP of the transactions involving Arthur, Bob, Camille, and Donita?
Which transaction is included in GDP?
Which transaction is included in GDP?
How can value added in an economy be determined?
How can value added in an economy be determined?
What is not considered when measuring GDP?
What is not considered when measuring GDP?
Why are some productive activities excluded from GDP?
Why are some productive activities excluded from GDP?
Which of the following is the final seller in the series of transactions described?
Which of the following is the final seller in the series of transactions described?
What are net exports defined as?
What are net exports defined as?
Which statement about GDP is incorrect?
Which statement about GDP is incorrect?
What is not a method used to measure GDP?
What is not a method used to measure GDP?
Which of the following transactions is considered economic investment?
Which of the following transactions is considered economic investment?
What is not counted as investment by national income accountants?
What is not counted as investment by national income accountants?
How would an increase in business inventories impact GDP?
How would an increase in business inventories impact GDP?
How are governmental transfer payments treated in GDP calculations?
How are governmental transfer payments treated in GDP calculations?
If GDP was $200 billion in year 1 and business inventories increased by $10 billion in year 2, what would be the GDP for year 2?
If GDP was $200 billion in year 1 and business inventories increased by $10 billion in year 2, what would be the GDP for year 2?
Which of the following is classified as consumption rather than investment?
Which of the following is classified as consumption rather than investment?
What does the term 'imports' refer to?
What does the term 'imports' refer to?
What is the correct method to calculate the price index for a market basket of goods?
What is the correct method to calculate the price index for a market basket of goods?
Which year had nominal GDP of $450?
Which year had nominal GDP of $450?
What is the real GDP in Year 3, given the data?
What is the real GDP in Year 3, given the data?
If nominal GDP rises, what can we conclude about real GDP?
If nominal GDP rises, what can we conclude about real GDP?
Based on the provided data, what is the price index for Year 1?
Based on the provided data, what is the price index for Year 1?
What was the increase in real GDP from 1990 to 2000?
What was the increase in real GDP from 1990 to 2000?
What does a comparison of real GDP in one period relative to another represent?
What does a comparison of real GDP in one period relative to another represent?
In a single-product economy, if the output and price are both increasing, what happens to nominal GDP?
In a single-product economy, if the output and price are both increasing, what happens to nominal GDP?
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Study Notes
Measuring Domestic Output and National Income
- GDP is the market value of all final goods and services produced within a country in a given period of time.
- Final goods and services are goods and services purchased by ultimate users, rather than for resale or further processing.
- Intermediate goods and services are goods and services used as inputs in the production of other goods and services.
- GDP excludes intermediate goods and services to avoid double-counting.
- Value added is the difference between the value of a firm's output and the value of the inputs it purchases from other firms.
- Value added can be determined by subtracting the purchase of intermediate products from the value of the sales of final products.
- GDP can be measured using the expenditure approach or the income approach.
- The expenditure approach to GDP is calculated as GDP = C + I + G + NX, where C is consumption spending, I is investment spending, G is government spending, and NX is net exports.
- Net exports are defined as a nation's exports less its imports.
- The income approach to GDP is calculated as GDP = Wages + Rental income + Interest + Profits + Depreciation + Taxes on production and imports.
- National income is the total income earned by resource suppliers in a country in a given period of time.
- Disposable income is the amount of income that households and non-profit institutions have left after paying taxes and non-tax payments.
- Nominal GDP is the value of GDP at current prices.
- Real GDP is the value of GDP at constant prices.
- A price index measures the average level of prices for a basket of goods and services in a given year relative to a base year.
- Using a price index, we can adjust nominal GDP to get real GDP.
- Real GDP is an adjusted measure of the value of goods and services produced that reflects changes in price levels.
- Economic investment includes any increase in business inventories.
Economic Investment
- Economic investment is spending on new capital goods, such as buildings and equipment.
- It includes any spending on inventories.
Other Key Points
- Government transfer payments are not counted in GDP.
- GDP is not a perfect measure of economic well-being.
- GDP does not take into account the distribution of income, the value of leisure, or the quality of the environment.
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