Chapter 7: Tracking the Macroeconomy

Question 1

GDP

Answer 1

1. a measure of the overall value of goods and services produced
2. one of most important measures used to track the macroeconomy or to quantify movements in the overall level of output and prices.

Question 2

National income and product accounts (national accounts)

Answer 2

keep track of the flows of money between different sectors of the economy

Question 3

Consumer spending

Answer 3

household spending on goods/services from domestic and foreign markets

Question 4

stock

Answer 4

share in the ownership of a company held by a shareholder

Question 5

bond

Answer 5

borrowing in the form of an IOU that pays interest

Question 6

Government transfers

Answer 6

payments by the govt to individuals for which no good or service is provided in return (Social security and/or unemployment insurance benefits)

Question 7

Disposable income

Answer 7

1. = income + govt transfers (SS & unemployment) – taxes
2. total amount of household income available to spend on consumption and to save.
3. Not all spent, instead set aside as private savings in financial markets (banks, etc.) where used to buy/sell stocks and bonds and make loans.
4. Therefore, private savings = disposable income - consumer spending (0r disposable income not spent on consumption)

Question 8

Circular-Flow diagram, revisited: underlying principle

Answer 8

the inflow of money into each market or sector = outflow of money coming from that market or sector

Question 9

simple world has households and firms

Answer 9

Households:

• engage in consumer spending
• own factors of production (labor, land, physical capital, human capital and financial capital)
• they sell the use of these factors to firms and receive wages, profit, interest payments and rent in return.
• additional income in form of stocks and bonds (dividends from stocks and interest payments on bonds).
• rent is received in return for letting firms use land or structures they own

Question 10

Govt borrowing

Answer 10

total amt of funds borrowed by federal, state and local govts in the financial markets (along with tax revenues, $ borrowed is used to buy goods/services)

Question 11

Govt purchases of goods and services

Answer 11

total expenditures on goods/services by federal, state and local govts (ie military spending on ammunition, local public schools expenditures)

Question 12

Exports

Answer 12

goods/services sold to other countries

Question 13

imports

Answer 13

goods/services bought from other countries

Question 14

inventories

Answer 14

stocks of goods/raw materials held to facilitate business operations

Question 15

Investment spending

Answer 15

spending on productive physical capital (ie machinery and construction of buildings, and on changes to inventories (an increase in inventory produced changes the ability of a firm to make future sales.) Conversely, a drawing down of inventories is counted as a fall in investment spending because it leads to lower future sales. Construction of homes is included because a new house produces a future stream of output – housing services for it’s occcupants.

Question 16

Another way to define GDP

Answer 16

consumer spending + investment spending + govt purchases + value of exports – value of imports = measure of overall market value of goods/services the economy produces.

Question 17

Final goods/services

Answer 17

those sold to the final or end user

Question 18

Intermediate goods/services

Answer 18

bought from one firm by another firm that are inputs for production of final goods/services

Question 19

YEt another way to define GDP

Answer 19

total value of all final goods/services produced in the economy during a given year

Question 20

Aggregate spending

Answer 20

the sum of consumer and investment spending, govt purchases of goods/services, and – imports = total spending on domestically produced final goods/services in the economy

Question 21

Calculating GDP by survey

Answer 21

1. Survey firms and add up the total value of their production of final goods/services
2. Do not include values of intermediate goods/services
3. To avoid double counting, count only each producer’s value added (value of sales - value of intermediate goods/services)

Question 22

Calculating GDP by adding up aggregate spending

Answer 22

1. add up aggregate spending on domestically produced final goods/services in the economy

Question 23

Calculating GDP by sum of total factor income

Answer 23

1. sum the total factor income earned by households from firms in the economy