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# ECON 2010 Study Guide - Quiz Guide: Time Series, Loanable Funds, Ebenezer Scrooge

48 pages565 viewsFall 2013

Department
Economics
Course Code
ECON 2010
Professor
All
Study Guide
Quiz

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Study Plan
Ch. 7: GDP: Measuring Total Production and Income
7.1 Gross Domestic Product Measures Total Production
1. 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: If, in macroeconomics, we measured production using
quantities, we would add tons of wheat grown by U. S. farmers to the number of
iPods produced by Apple, to gallons of milk, and so on. When we measure total
production, we can’t just add together the quantities of every good and service
because the result would be meaningless. Measuring production using market
value in dollar terms allows us to add together many different goods and
services. Both A and C.
2. If the U.S. Bureau of Economic Analysis (BEA) added up the values of every good and
service sold during the year, would the total be larger or smaller than measured gross
domestic product (GDP)?
Larger: The value of all goods and services sold would include intermediate
goods.
3. In the circular flow of expenditure 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.
4. Which equation represents the relationship between GDP and the four major
expenditure components?
Y=C+I+G+NX
What are the four major components of expenditures in GDP?
Consumption, investment, government purchases, and net exports.
5. What is the difference between the value of a firm’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.
6. Is the value of intermediate goods and services produced during the year included in
Gross Domestic Product (GDP)? For example, is cotton used to produce a new shirt
included in GDP?

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Yes. The value of the cotton is not directly counted in GDP, but the production of
cotton is included in the value-added method of measuring GDP.
7. Indicate whether each of the following transactions represents the purchase of a final
good.
The purchase of steel from a steel mill by an automobile manufacturer. Is no the
purchase of a final good.
The purchase of an aircraft carrier by the federal government. Is the purchase of
a final good.
The purchase of domestic wine by a French consumer. Is the purchase of a final
good.
The purchase of a new machine tool by the Ford Motor Company. Is the
purchase of a final good.
8. Indicate whether you agree or disagree with the following statement: “In years when
people buy few shares of stock, investment will be low and, therefore, so will gross
domestic product (GDP).”
Disagree: Investment as a component of GDP refers to the purchase of physical
and human capital and inventory, not stock purchases.
9. Indicate which component of GDP will be affected by each of the following transactions
involving the Ford Motor Company.
You purchase a new Ford Escape Hybrid from a Ford dealer. Consumption
Expenditure
You purchase a 2008 (pre-owned) Ford Escape Hybrid from a friend. Not
included in GDP calculation.
Ford purchases door handles for the Escape from an auto parts manufacturer in
Indiana. Not included in GDP calculation.
Ford produces 1,000 Escapes in a factory in Missouri and ships them to a car
dealer in Shanghai, China. Not Export Expenditure
Ford purchases new machine tools to use in its Missouri Escape factory.
Investment Expenditure
The state of Missouri builds a new highway to help improve access to the Ford
Escape plant. Government Expenditure
10. Suppose a house is built and sold in the year 2000. If the house is resold in the year
2011, is the value of the house included in Gross Domestic Product (GDP) for 2011?

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No. GDP for 2011 includes only production that occurs during 2011.
Would the services of a real estate agent who helped sell (or helped buy) the
house be included in GDP for 2011?
Yes. GDP for 2011 includes the market value of final goods and services.
This includes real estate services.
11. An article in the Wall Street Journal observed: “Plenty of companies, both in the U. S.
and abroad, came to depend on U.S. consumers for their growth. They may have to
peddle their wares elsewhere.” U.S. and foreign firms will need to depend less on U.S.
consumers in the future because
U.S. consumers are saving more and spending less.
12. Suppose that a simple economy produces only the following four goods and services:
textbooks, hamburgers, shirts, and cotton. Further, assume that all of the cotton used in
the production of shirts. Use the information in the following table to calculate Nominal
Gross Domestic Product (NGDP) for 2011. Production and Price Statistics for 2011
The NGDP for the year 2011 is \$7,450.
13. For the total value of expenditures on final goods and services to equal the total value of
income generated from producing those final goods and services, all the money that a
business receives form the sale of its product must be paid out as income to the owners
of the factors of production. How can a business make a profit if it pays out as income all
Profit is the income that remains after a firm has paid wages, rent, and interest.
14. Review the following events: 1. A farmer sells \$200 worth of wheat to an agricultural
products distributor. 2. The distributor trims, packages, and sells the wheat to a state-
owned bakery for \$300. 3. The state-owned bkaery uses all of the wheat to make bread
and then sells it for \$250.
If, for simplicity, we ignore the value of inputs used to grow the wheat-such as
seeds, labor, and fertilizer, then the farmer’s value added is \$200. (Enter your
response as an integer and include a minus sign if necessary.)
The value added for the distributor is \$100.