ECO Chapter 8

The income households actually receive before they pay personal income taxes​ is:

personal income

Suppose social security contributions rise by​ $1 billion while social security benefits also rise by​ $1 billion.​ Further, personal income taxes fall by​ $500 million. As a​ result,

disposable income should increase while personal income and national income are unchanged.

An increase in corporate income taxes would reduce

personal income.

An increase in social security benefits will make

personal income larger.

GDP

Disposable Personal Income + Personal income Tax & nontax payments + Corporate taxes, social security contributions + indirect business taxes + depreciation – (gov and businesses transfer payments)

National income is income earned by all U.S. factors of production.

True

Personal income is the income received by households after personal income taxes are paid.

False- Personal income is the income received by the factors of production prior to the payment of personal income taxes.

Disposable personal income refers to the income used by households for all purchases of nondurable goods during a year.

False- Disposable personal income is personal income after personal income taxes have been paid.

To go from personal income to disposable personal​ income, personal income taxes must be subtracted.

True

To obtain [blank] we subtract indirect business taxes and transfers from net domestic product and add other business income adjustments and net U.S. income earned abroad.

national income

To obtain [blank] we must add government transfer​ payments, such as Social Security benefits and food stamps. We must subtract income earned but not received by factor​ owners, such as corporate retained​ earnings, Social Security​ contributions, and corporate income taxes.

personal income

To obtain disposable personal​ income, we subtract all personal [blank] from personal income. Disposable personal income is income that individuals actually have for consumption or saving.

income taxes

Gross domestic product​ (GDP)

The total market value of all final goods and services produced during a year by factors of production located within ​ nation’s borders.

Distinguishing Between Nominal GDP and Real​ GDP

Nominal GDP is the value of newly produced output during the current year measured at current market prices. Real GDP adjusts the value of current output into constant dollars by correcting for changes in the overall level of prices from year to year. Real GDP is calculated by designating a particular year as the base year and then using the prices of goods and services in the base year to calculate the value of goods and services in all other years.

Real GDP

sum of all price base year x quantity of other years

Price index

Nominal GDP/ Real GDP x (100)

What is the difference between nominal GDP and real​ GDP?

Nominal GDP is measured in current market prices while real GDP corrects for changes in the overall level of prices from year to year.

Real GDP is computed by adjusting nominal GDP for

changes in the price level.

If real GDP increases in any​ year, we know that

the output of goods and services produced this year has increased.

If nominal GDP​ increases, it is possible that

any of the above might have happened. -output has increased. -prices has increased -both has increased

When comparing per capita GDP across​ countries, GDP should be adjusted for

purchasing power parity.

Per capita real GDP equals

real​ GDP/population.

The country with the highest per capita GDP based on purchasing power parity​ (U.S. dollars) is

the United States.

The problem with using foreign exchange rates to convert one​ country’s GDP into dollars is that

not all goods and services are sold on world markets.

The adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries is called

purchasing power parity.

When GDP is corrected to reflect constant​ dollars, this​ price-corrected GDP is called

real GDP

The difference between real GDP and nominal GDP for the same year reflects the amount of inflation that occurred during that year.

True

Per capita real GDP measures the amount of real GDP

per person

The adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries is known as purchasing power parity.

True

To correct nominal GDP for price​ changes, we first select a base year for our price index and assign it the number

100

We can divide the [blank] into real GDP to obtain per capita real GDP.

population

Statisticians often calculate relative GDP by adding up each​ country’s GDP in its local currency and dividing by the dollar

exchange rate

Because not all goods and services are bought and sold in the world​ market, however, we must correct exchange rate conversions of other​ countries’ GDP figures to take into account differences in the true [blank] across countries.

cost of living

The flow of gross domestic product during a given interval must always be equivalent to the flow of gross domestic income within that same period because

Both​ (a) and​ (b) are correct. – profit is defined as what is left over from total business receipts after all other costslong dash—​wages, ​rents, interestlong dash—have been paid. – spending by one group is income to another.

According to the circular flow of income and​ output, which of the following is not​ true?

​Goods, services and money all flow in one direction since money pays for the goods and services.

Total income can be viewed as the sum of

All of the above. -payments to factor services such as​ land, labor,​ capital, and entrepreneurial activity. -the dollar value of output produced since total income and total production are equal. ​-wages, rents,​ interest, and profits

Total income equals the dollar value of total output becauseTru

spending by one group represents income to the other group.

In the circular flow of income

households demand goods and services that are supplied by​ firms, while supplying resources that are demanded by firms.

For a​ business, profit is a cost of production.

True

Total income is the annual cost of producing the entire output of final goods and services.

True

In product​ markets,

consumer goods and services flow to households and money flows to businesses.

The dollar value of total output is always equal to total income.

True

In the circular flow model of income and​ output, households sell [blank] services to businesses that pay for those services. The receipt of payments is total
[blank]. Businesses sell goods and services to households that pay for them.

factor/income

The dollar value of total output is equal to the total monetary value of all [blank] goods and services produced.

final

The dollar value of final output must always equal total income. The variable that adjusts to make this so is known as

profit

A woman who makes a living charging for investment advice on her Internet Web site marries one of her​ clients, to whom she now provides advice at no charge. As a result of​ this, GDP

decreases

A tennis player wins two top professional tournaments as an unpaid​ amateur, meaning the tournament sponsor does not have to pay out his share of prize money. As a result of​ this, GDP

remained unchanged

A company that had been selling used firearms illegally finally gets around to obtaining an operating license and performing background checks as specified by law prior to each gun sale. As a result of​ this, GDP

remained unchanged

Which of the following statements is not true about the use of GDP as a measure of national​ welfare?

GDP is a useful measure of national welfare since it excludes nonmarket transactions.

Gross Domestic Product

All of the above -only includes​ "final" goods and services to avoid double counting. -does not include transfer payments or financial transactions. -does not include the transfer of​ second-hand goods.

Gross domestic product is defined as

the dollar value of all final​ goods, but not​ services, produced in an economy over the past 100 years.

GDP counts intermediate goods because to not do so would result in GDP being undervalued.

False

All of the following transactions are excluded from the measure of GDP except

paying your dentist to have your teeth cleaned.

Which of the following statements is​ correct?

GDP excludes nonmarket production and is not a measure of a​ nation’s overall welfare.

To avoid double​ counting, we look only at final goods and services produced​ or, equivalently, at

value added

In measuring​ GDP, we must [blank] purely financial​ transactions, such as the buying and selling of​ securities; (2) government transfer payments and private transfer​ payments; and​ (3) the transfer of secondhand goods.

exclude

Many other transactions are excluded from measured
[blank] among them household services rendered by​ homemakers, underground economy​ transactions, and illegal economic​ activities, even though many of these result in the production of final goods and services.

GDP

GDP is a useful measure for tracking changes in the
[blank] of overall economic activity over​ time, but it is not a measure of the​ well-being of a​ nation’s residents because it fails to account for nonmarket​ transactions, the amount and quality of leisure​ time, environmental or safety​ issues, labor market​ discrimination, and other factors that influence general welfare.

market value

8.3 GDP=

consumption + investments + government spending + (exports – imports)

8.3 NDP=

GDP – depreciation

8.3 NI=

NDP – indirect business taxes

8.3 GDI=

rent + wages + profit + interest + depreciation +indirect business taxes -same as GDP

8.3 GPDI=

GDP – consumption – gov. spending – exports + imports

8.3 Personal income=

GDI + Gov. Transfer Payment – (depreciation + indirect business taxes + corporate taxes + social security)

8.3 Personal disposable Income=

Personal income – personal income taxes

The expenditure approach to tabulating GDP

adds up the total amount spent on newly produced domestic goods and services during the year.

The largest component of GDP by far is

personal consumption expenditures.

If a household purchases a new car and a new​ refrigerator, this would be classified as spending on

consumer durables.

he biggest component of GDP using the expenditure approach is​ ____________ and the biggest component of GDP using the income approach is​ _____________.

consumer​ expenditures; wages

To derive GDP using the expenditure​ approach, which of the following components are added​ togehter?

consumption​ expenditures, gross private domestic​ investment, government​ expenditures, and net exports

Which of the following equations is​ correct?

-GDP minus− depreciation​ = NDP -NDP​ = C​ + I​ + G​ + X minus− depreciation -GDP​ = C​ + netI​ + G​ + X​ + depreciation All of the above equations are correct

Gross domestic income​ (GDI) is identical to gross domestic product​ (GDP).

True

Which of the following equations is used to calculate gross domestic income​ (GDI)?

wages​ + interest​ + rent​ + profit​ + indirect business taxes​ + depreciation​ = GDI

The _________ approach to measuring GDP requires that we add up consumption​ expenditures, gross private​ investment, government​ purchases, and net exports. Consumption expenditures include consumer ________, consumer _________, and __________.

expenditure/durables/nondurables/services

To derive GDP using the income​ approach, we add up all factor​ payments, including _______,_______, _______, and ________.

wages/profit/interest/rent

To get an accurate measure of GDP using the income​ approach, we must also add ___________ and _______ to those total factor payments.

indirect business taxes/depreciation