19.1 Q&A

Why in microeconomics can we measure production in terms of quantity, but in macroeconomics we measure production in terms of market value?

All of the above. – adding tons of wheat to ipods to milk.. – just adding different goods would be meaningless – Measuring in dollars allows to add different goods

If the BEA added up the values of every good and service sold during the year, would the total be larger or smaller than GDP?

Larger. The value of all goods and services would include intermediate goods

In the circular flow of expenditures and income, why must the total value of production in an economy equal the total value of income?

Every penny spent on a good or service must end up as someone’s income.

Which equation represents the relationship between GDP and the four major expenditures components?

What are the four components of expenditures in GDO

Y = C + I + G + NX Consumption Investment Government purchases Net Exports

What is the difference between the value of a form’s final product and the value added by the firm to the final product?

The value of a firm’s final product is the sale price; value added is the difference between the sale price and the price of intermediate goods.

Is the value of intermediate goods and services produced during the year included in GDP?
For example, is a computer chip used to produce a new PC included in GDP?

YES. The value of the computer chip is not directly counted in GDP, but the production of a computer chip is included in the value added method of measuring GDP

Indicate whether each of the following transactions represents the purchase of a final good

1. The purchase of tires from Bridgestone by an automobile manufacturer?

2. The purchase of two new elementary school buildings by the state government?

3. The purchase of french wine by a US consumer?

4. The purchase of a new machine tool by the Ford Motor company?

1. Is NOT 2. IS purchase of FINAL 3. IS purchase of FINAL 4. IS purchase of FINAL

[Related to the chapter opener]
Indicate which component of GDP will be affected by each of the following transactions involving the Ford Motor Company

a. You purchase a new Ford Escape from a Ford Dealer

b. You purchase a 2011 (Preowned) Ford Escape from a Friend

c. Ford purchases door handles for the Escape from India

d. Ford produces 1000 Escapes in Missuri and ships them to a car dealer in Shanghai

e. Ford purchases new machinery

f, The state of Missouri builds a new Highway

a. Consumption Expenditures b. Not included in GDP calculation c. Not included in GDP calculation (Intermediate good) d. Net Export Expenditures e. Investment Expenditures f. Government purchase

Suppose a house is built and sold i the year 2006. If the house is resold in the year 2015, is the value of the house included in the GDP of 2015?

Would the service of a real estate agent who helped sell (or buy) the house be included in the GDP for 2015?

NO. GDP for 2015 includes only production that occurs in 2015 YES GDP for 2015 includes the market value of final goods and services (such as real estate)

[Related to solved problem #1] Suppose that a simple economy …
Use the information in the following table to calculate Nominal GDP for 2015

(10060)+(1002)+(50*25)=7,450 Cotton is excludes because its an intermediate good

[Related to don’t let this happen to you] Indicate whether you agree or disagree with the following statements.

"In years when people buy few share of stock, investments will be low and therefore will GDP

Disagree Investment as component of GDP refers to the purchase of physical and human capital and inventory. Not stock quotes

[Related to making the connection]
"Lady Gaga writing a new song is like a factory is investing in a new machine"

Which of the following statement is correct?

Song development time produces songs, similar to investment in a factory produces physical goods.

An artists buys scrap metal from a local steel mill. […] With the steel she produced 10 authentic sculptures that she sold for $800 each to a local art dealer. The art dealer sold all of the sculptures for an average of $1000. each.

The total value added of the art dealer is..?

2000 (1000-200)*10 Value added is the difference between the sale price and the price of intermediate goods.

Gross Domestic Product is defined as..?

What happens if we measure GDP by adding up the value of every good and service produced in the economy?

the market value of all final goods and services produced in a country during a period of time, typically one year. GDP is overestimated because of double counting

An important conclusion to draw from the circular flow diagram is that

In the circular flow diagram, who supplies factors of production in exchange for income?

we can measure GDP by calculating the total value of expenditures on final goods and services, or we can measure GDP by calculating the value of income. households

Which of the following is included the economists definition of investment?

In calculating GDP, which level of Gov. spending are included in Gov. purchases?

The purchase of new machinery, factories, or houses Spending by federal, stage, and local government.

Which of the following is true about the consumption component of US GDP in 2012?

Which of the following is true about the government purchases component of US GDP in 2012?

Consumption spending on services was greater than the sum of spending on durable and non-durable goods. Purchases by state and local government was greater than purchase by the federal Gov.

The difference between the price the firm sells a good and the price the form paid other firms for intermediate goods is called?

value added