chapter8posttest

A car that is produced in the U.S. by a German car company increases:
answer:  the U.S.'s GDP and Germany's GNP.
Feedback: GDP focuses on output produced within a country's borders; GNP focuses on output produced by its citizens and businesses, including those located abroad.

Assume your country only produces three goods. The total annual production, along with the goods' prices, is listed above. Calculate nominal GDP.
Answer:  $2,300,000
Feedback: In calculating GDP, each good is weighted by its price. This means the price and quantity for each good need to be multiplied together. The resulting mathematical products are then added together.

GDP measures:
Answer:the flow of final goods and services produced.
Feedback: GDP is a flow. It represents the market value of final output.

Assume that, in a given year, a baker buys $1,000 worth of flour and other ingredients and uses these to bake bread that he sells for $4,000. Half of this bread is sold to customers as final goods, and half is sold to a restaurant. How much value has the butcher added to GDP?
Answer:  $3,000.00
Feedback: His value added is $3,000 which is the baker's sales ($4,000) less what he paid for intermediate goods ($1,000). The bread he sold to the restaurant would still count in his value added but would not count in theirs. The value added technique is used to avoid double counting.

Whenever a good or service is produced, somebody receives income for producing it. Therefore, GDP:
Answer: must be calculated using the value-added technique.
Feedback: This aggregate accounting identity allows GDP to be calculated by adding together either income or spending.

The largest component of aggregate income is:
Answer:  compensation of employees
Feedback: In the United States, compensation of employees accounts for 71% of total income earned.

In aggregate accounting, which of the following is an investment?
Answer:  The purchase of a new computer by an accounting firm.
Feedback: Gross private investment is spending, largely by businesses, on new capital. The purchase of financial assets is not counted in GDP; an individual's purchase of a new computer is consumption spending; the purchase of previously-produced capital is not counted in GDP.

If nominal GDP grows by 3% and, over the same time, inflation was 3.2%, then:
Answer:  real GDP shrank
Feedback: To distinguish between increases in GDP caused by inflation or by rising productivity, economists look at real GDP. In this case, all of the growth in GDP was caused by inflation and the real economy was actually shrinking. The growth rate of nominal GDP (3%) is equal to the sum of the growth rate of prices (3.2%) and the growth rate of real GDP (–0.2%).

Why is it difficult to construct a good measure of real wealth?
Answer:  Because we lack a good measure of asset inflation.
Feedback: If we had a measure of asset inflation, we could adjust nominal wealth to find real wealth. Unfortunately, it is difficult to determine whether or not the change in the price of an asset reflects changes in the productive capacity of the asset, we have no actual measure of asset inflation, which means we have no good measures for real wealth.

Which of the following is not an issue one needs to address when comparing welfare among countries?
Answer:  Aggregate economic statistics are only available for developed countries.
Feedback: Most countries use somewhat similar measures to calculate GDP. Per capita real GDP, adjusted for purchasing power parity, is a useful starting point when comparing welfare. Problems still remain, however, including the issue of valuing non-market activities.