Deck 7: Measuring the Aggregate Economy

Question 1

What is inflation and how do we measure it? Which prices does each of the major price indexes actually measure? How can a price index be used to convert nominal output into real output?

Answer 1

Inflation is a sustained rise in the price level.We measure it using a variety of price indexes, including the PPI, GDP Deflator, CPI, and PCE deflator.The PPI, or the producer price index, measures the selling prices received by domestic producers.The GDP Deflator is an index of the average price of the components in total output (or GDP), relative to a base year.The CPI, the consumer price index, measures the prices of a fixed basket of consumer goods.The PCE deflator is a measure of consumer prices that allows yearly changes in the basket of goods.
Real output is the total amount of goods and services produced, adjusted for price-level changes.Nominal output is the total amount of goods and services measured at current prices.The two are related via the following formula: real output = (nominal output $\div$ price index) × 100.That is, real output can be found by dividing nominal output by a price index and then multiplying the result by 100.

Question 2

What are personal consumption expenditures?

Answer 2

Personal consumption expenditures are payments by households for goods and services

Question 3

In economics it is important to know the distinction between flow concepts and stock concepts.Explain this distinction, and give examples of each.

Answer 3

A stock represents a quantity of something at a given point in time.An example is your bank balance.Your bank statement indicates a balance in your account, as of the date the statement was issued.This is your stock of money in that account at that moment in time.Another example of a stock concept is your current weight.A flow concept is associated not with a point in time, but with a time period.An example is your income.When a person states their income, it must be with reference to a time period to be meaningful.An income of $800 per week is very different from $800 per month.GDP and GNP are flow concepts.They are measures of aggregate output per year.

Question 4

Why might per capita GDP comparisons of living standards between countries be misleading? What do economists do to avoid some of the problems?

Question 5

What is gross private investment?

Question 6

If nominal GDP grew at 4% per year over the past four years, can we be sure that everyone is better off now? Explain your answer.

Question 7

What is the difference between GDP and GNP? How are they related?

Question 8

Define real and nominal GDP and explain why the growth of real GDP is more important to society than the growth in nominal GDP?

Question 9

What are the four expenditure components of GDP?

Question 10

Why is the definition of profit the key to explaining the equality between aggregate income and aggregate production?

Question 11

Without national income accounting there would not be any macroeconomics.Evaluate this statement.

Question 12

How can GDP be calculated without "double counting"?

Question 13

What is the difference between Gross Domestic Product (GDP) and Gross National Product (GNP) ? What is the difference between Gross Domestic Product (GDP) and Net Domestic Product (NDP)?

Question 14

What is the distinction between gross domestic product (GDP) and net domestic product (NDP)? In theory, which is a superior measure of aggregate output?

Question 15

Why will calculating GDP using the expenditure approach give you the same value as using the income approach? What types of data would be needed for each approach?

Question 16

What is meant by "GDP"? What are the four expenditure components of GDP and what is included in each of these components?

Question 17

What is national income? What are its four components?

Question 18

Aggregate income is divided into four categories.They are (1) Compensation of Employees, (2) Rents, (3) Interest and (4) Profits.Briefly describe what is and is not included in each category.

Question 19

Purchases of stocks and bonds in economic terminology are not investment.Explain why this statement is true.

Question 20

There are two possible ways to avoid counting intermediate goods (i.e., double counting) in calculating GDP.Identify each of them and discuss each briefly.

Question 21

Suppose there is a stock market bubble (asset price inflation) that bursts (rapid asset deflation).People see the value of their investments fall rapidly.Has their real wealth changed? Explain.

Question 22

If the inflation rate is 6% and the nominal interest rate is 8%, what is the real rate of interest?

Question 23

You've been given the following data:
On the basis of these data calculate GDP, NDP, and GNP.

Question 24

Your economics professor asked you to use data from the U.S.economy to show that GNP can be calculated using the income approach and the expenditures approach.What type of data should you gather to complete this assignment?

Question 25

Answer all of the following questions concerning GDP growth.
(a) Nominal GDP increases from $5 trillion to $5.5 trillion while the price level increases by 10%.Has real income increased?
(b) Nominal GDP increases from $6 trillion to $6.8 trillion while real GDP increases from $6 trillion to $6.2 trillion.What happened to the price level?
(c) Nominal GDP increases from $7 trillion to $8 trillion while real GDP increases from $7 trillion to $7.5 trillion.By what percent did real income change?

Question 26

What is nominal wealth?

Question 27

In calculating GDP by the expenditure method, there are two ways to avoid the double counting of intermediate goods.Demonstrate your understanding of these two methods by showing how both produce the same calculation of contribution to GDP.Assume the following: 1) Iron ore is produced by iron mining, which is sold to steel makers for $30 million (we will make the simplifying assumption that iron mining uses no intermediate goods).2) The iron ore is all used to make steel, which is sold to automobile makers for $100 million.3) The steel is all used to make automobiles, which are sold to dealers for $250 million.4) All of the automobiles are sold by the dealers to consumers for $350 million.What are the two methods, and what contribution to GDP can be calculated by each method, from the above assumptions?

Question 28

If real income has risen from $5 trillion to $5.3 trillion and the price level went up by 12%, by what dollar amount has nominal income risen?

Question 29

Calculate the contribution to GDP that would be the result of each of the following transactions:
(a) The government purchases an airplane for $6 million.
(b) A citizen sells a used car for $6,000.
(c) A citizen sells a used car to a dealer for $6,000, who resells it to a consumer for $7,500.
(d) A citizen sells a bond for $1,000 that they bought last year for $600.
(e) The government issues a social security check for $1,250 (ignore the administrative costs of issuing the check).

Question 30

What is net foreign factor income, and how can we use it to determine whether GNP or GDP is larger?

Question 31

Why is it difficult to measure real wealth?

Question 32

If asset price inflation has occurred, which has changed: real wealth, nominal wealth or both?

Question 33

Determine the amount contributed to GDP from the sale of 200,000 copies of an album.Base your answer on the following information:
The artist receives $3 per album in royalties.
The producer sells each album to wholesalers for $10.
Wholesalers sold the album to retailers for an average price of $12 per album.
Retailers sold 200,000 album s to consumers for $15 per album.
Demonstrate how the value-added approach equals the final sales approach.

Question 34

If an economy consists of two goods, and one good's price goes up by 5% and the other good's price goes down by 5%, what is the most precise answer we can give about the amount of inflation in the economy?

Question 35

Assume an economy produces just cars and computers; use the information in the table below to answer the following questions about the GDP.
(1) Calculate nominal GDP in 2018 and 2019.What is the growth rate in nominal GDP?
(2) Using 2018 as a base year, calculate real GDP in 2019.What is the growth rate in real GDP?
(3) Calculate the GDP deflator in 2019.

Question 36

Describe in your own words the difference between a stock and a flow.For each of the following activities, determine whether it is a stock concept or a flow concept:
(a) Sue earns $5.75 per hour working at the Burger Barn.
(b) On his way home from work, Sam finds a ten-dollar bill.
(c) Upon graduation, John accepts a job with a salary of $2000.
(d) Jennifer saves 10% of her monthly income.
(e) Alex saves $1,000 a year.
(f) Japan has a capital to labor ratio of 10 where China has a capital to labor ratio of 2.

Question 37

What is national income accounting and why is it useful?

Question 38

What is real wealth?

Question 39

Which of the following transactions is considered a purchase of final output? Which one is considered the purchase of an intermediate good?
(a) Albert purchased a camera from the U.S.to use on his vacation in the Bahamas.
(b) Albert purchased a roll of film to use in his camera.
(c) An owner of a bakery purchased wheat to make bread.
(d) A chocolate factory purchased milk to make chocolate.
(e) The Ford Company purchased 10 tons of steel to make cars.
(f) Sue purchased cleaning detergent to use in her newly purchased washing machine.
(g) Karen bought tomato seeds and planted them in her backyard for her own use.

Question 40

Explain the difference between real and nominal output.Explain how they are related.

Question 41

What is real GDP?

Question 42

What is inflation?

Question 43

Real GDP and per capita real output are two indicators used by the government to measure economic growth.Define them, and explain why growth of per capita real output is a more accurate measurement of the growth in the economic welfare of individuals.

Question 44

Define the following price indices: PPI, GDP Deflator, CPI, and PCE deflator.

Question 45

Real output is $550 billion and nominal output is $600 billion.What is the value of the price index?

Question 46

Fill in the blanks of the following table and answer the following questions.
Year Real GDP Nominal GDP GDP Deflator
2018 8,144.8 __________ 101.9
2019 __________ 8,759.9 103.1
2020 8,848.2 9,256.1 __________
(a) Does the table indicate there is inflation? Explain your answer.
(b) What was the percentage change in nominal GDP in 2006 and 2007? Inflation? Real GDP?

Question 47

Nominal output has increased from $600 billion to $720 billion.The GDP deflator has risen by 10%.By what dollar amount has real output risen?