BMAL-590 MACROECONOMICS
EXAM REVIEW QUESTIONS AND
ANSWERS
Why is GDP useful to examine? - Answer- 1. Estimate living standards across time and
nations
2. Measure economic growth
3. Determine whether an economy is experiencing a short-run expansion or recession
Why does GDP count the "market value"? - Answer- Quantities do not provide enough
information.
For example, in 2010, the United States produced:
12 billion bushels of corn
8 million cars
Quantities would suggest that corn is more "important" to GDP relative to cars
We need to compute the market value of goods and services in order to aggregate and
form the measure of GDP. Market value of a good or service can be defined as the
price per unit multiplied by the number of units produced.
The units for various quantities cannot be added together (e.g., gallons of milk, cups of
coffee, pounds of steak, bottles of perfume, etc.).
GDP includes both goods and services: - Answer- - Goods
Tangibles
Food, clothing, cars, houses, etc
- Services
Intangibles
Health care, entertainment, advice, travel, banking, etc
A higher percentage of our GDP comes from services today than ever before.
Today, services account for over two-thirds of total output/GDP.
The composition of our industries and economy has greatly changed over the last 50
years.
Services as a Share of U.S. GDP - Answer- A majority of U.S. GDP is service output
such as financial, transportation, retail, and technology services. This graph shows
services as a share of U.S. GDP since 1960, which have grown from 50 percent in 1960
to about 70 percent in 2013
,Intermediate verses Final Goods - Answer- Intermediate goods are goods that firms
repackage or bundle with other goods to be sold at a later stage.
For example, ingredients sold to a coffee shop, such as milk and coffee, are
intermediate goods.
Note: If milk or coffee are sold directly to a consumer (e.g., in a grocery store), the same
goods are now considered final goods.
The tires sold to a car manufacturer are intermediate goods where as those sold directly
to a consumer from an auto store are considered to be final goods.
Final goods
Goods sold to the final users or consumers.
To get an accurate GDP estimate and avoid double counting final goods are included in
GDP and intermediate goods are not.
NOTE: If intermediate goods were counted as part of GDP, they would essentially be
counted twice. Their value also increases the market value of the final good. Double-
counting would bias the measure of GDP upward.
The Bureau of Economic Analysis (BEA) - Answer- the U.S. government agency that
tallies GDP data. The task is called national income accounting.
Durable goods: - Answer- Goods consumed over a long period of time, such as cars
and appliances.
They are more subject to cyclical fluctuations, as people tend to postpone buying goods
that last for many years when the economy is struggling.
Fore example, if the economy is week (job loss, high levels of uncertainty, lower
incomes), people can usually delay the purchase of a new refrigerator/other appliance
and use the old one for a few more months.
Non-durable goods: - Answer- Goods consumed over a short period of time, such as
groceries, magazines, and medicines.
They are not affected as much by cyclical fluctuations. They are usually purchased
irrespective of the economic environment.
Groceries are an example of non-durable goods. People will always need to eat and will
purchase groceries regardless of economic conditions.
However, people may substitute lower-quality (lower-cost) non-durable goods during
economic contractions.
, Investments - Answer- Capital purchases including small purchases such as tools, as
well as other more substantial spending such as equipment, computers, and factories.
Changes in business inventories such as goods that have been produced but not yet
sold, representing a future increase in output.
New residential housing purchases are counted as investments; not consumption.
Note: Investment does not include purchases of stocks and bonds.
Government Purchases - Answer- Government purchases refer to spending by state,
local, and federal governments on goods and services.
Transfer payments are not included.
Transfer payments are government outlays to households, including welfare and social
security. While transfer payments do increase household income, this does not fit into
the expenditure definition of GDP. However, when households spend this income, it
does enter into GDP as part of consumption or investment.
Net Exports - Answer- Imports are subtracted from the total level of GDP because they
were not produced here (even though they are used here) and GDP is a measure of
domestic production.
Exports enter positively into the GDP equation because they are part of domestic
production.
A trade deficit is not necessarily "bad" even though it does decrease GDP. All else
equal, a trade deficit implies that people are consuming more goods and services.
Nominal GDP - Answer- GDP measured in current prices
Real GDP - Answer- GDP measured with prices held constant over time
Price level - Answer- a measure of the average prices of goods and services in the
economy
"GDP deflator" is a Price Level Index that includes prices of final goods and services in
GDP but removing the effect of inflation
Real GDP: Adjusting GDP for Price Changes - Answer- Generally, prices rise over time.
Therefore, if we do not take this into account when measuring GDP and trying to make
historical comparisons, we will likely overestimate increases in GDP. Nominal GDP is
calculated by aggregating the market value (price times quantity) of goods and services
produced in a country during a given time period. The prices used are those at the time
GDP is calculated.
EXAM REVIEW QUESTIONS AND
ANSWERS
Why is GDP useful to examine? - Answer- 1. Estimate living standards across time and
nations
2. Measure economic growth
3. Determine whether an economy is experiencing a short-run expansion or recession
Why does GDP count the "market value"? - Answer- Quantities do not provide enough
information.
For example, in 2010, the United States produced:
12 billion bushels of corn
8 million cars
Quantities would suggest that corn is more "important" to GDP relative to cars
We need to compute the market value of goods and services in order to aggregate and
form the measure of GDP. Market value of a good or service can be defined as the
price per unit multiplied by the number of units produced.
The units for various quantities cannot be added together (e.g., gallons of milk, cups of
coffee, pounds of steak, bottles of perfume, etc.).
GDP includes both goods and services: - Answer- - Goods
Tangibles
Food, clothing, cars, houses, etc
- Services
Intangibles
Health care, entertainment, advice, travel, banking, etc
A higher percentage of our GDP comes from services today than ever before.
Today, services account for over two-thirds of total output/GDP.
The composition of our industries and economy has greatly changed over the last 50
years.
Services as a Share of U.S. GDP - Answer- A majority of U.S. GDP is service output
such as financial, transportation, retail, and technology services. This graph shows
services as a share of U.S. GDP since 1960, which have grown from 50 percent in 1960
to about 70 percent in 2013
,Intermediate verses Final Goods - Answer- Intermediate goods are goods that firms
repackage or bundle with other goods to be sold at a later stage.
For example, ingredients sold to a coffee shop, such as milk and coffee, are
intermediate goods.
Note: If milk or coffee are sold directly to a consumer (e.g., in a grocery store), the same
goods are now considered final goods.
The tires sold to a car manufacturer are intermediate goods where as those sold directly
to a consumer from an auto store are considered to be final goods.
Final goods
Goods sold to the final users or consumers.
To get an accurate GDP estimate and avoid double counting final goods are included in
GDP and intermediate goods are not.
NOTE: If intermediate goods were counted as part of GDP, they would essentially be
counted twice. Their value also increases the market value of the final good. Double-
counting would bias the measure of GDP upward.
The Bureau of Economic Analysis (BEA) - Answer- the U.S. government agency that
tallies GDP data. The task is called national income accounting.
Durable goods: - Answer- Goods consumed over a long period of time, such as cars
and appliances.
They are more subject to cyclical fluctuations, as people tend to postpone buying goods
that last for many years when the economy is struggling.
Fore example, if the economy is week (job loss, high levels of uncertainty, lower
incomes), people can usually delay the purchase of a new refrigerator/other appliance
and use the old one for a few more months.
Non-durable goods: - Answer- Goods consumed over a short period of time, such as
groceries, magazines, and medicines.
They are not affected as much by cyclical fluctuations. They are usually purchased
irrespective of the economic environment.
Groceries are an example of non-durable goods. People will always need to eat and will
purchase groceries regardless of economic conditions.
However, people may substitute lower-quality (lower-cost) non-durable goods during
economic contractions.
, Investments - Answer- Capital purchases including small purchases such as tools, as
well as other more substantial spending such as equipment, computers, and factories.
Changes in business inventories such as goods that have been produced but not yet
sold, representing a future increase in output.
New residential housing purchases are counted as investments; not consumption.
Note: Investment does not include purchases of stocks and bonds.
Government Purchases - Answer- Government purchases refer to spending by state,
local, and federal governments on goods and services.
Transfer payments are not included.
Transfer payments are government outlays to households, including welfare and social
security. While transfer payments do increase household income, this does not fit into
the expenditure definition of GDP. However, when households spend this income, it
does enter into GDP as part of consumption or investment.
Net Exports - Answer- Imports are subtracted from the total level of GDP because they
were not produced here (even though they are used here) and GDP is a measure of
domestic production.
Exports enter positively into the GDP equation because they are part of domestic
production.
A trade deficit is not necessarily "bad" even though it does decrease GDP. All else
equal, a trade deficit implies that people are consuming more goods and services.
Nominal GDP - Answer- GDP measured in current prices
Real GDP - Answer- GDP measured with prices held constant over time
Price level - Answer- a measure of the average prices of goods and services in the
economy
"GDP deflator" is a Price Level Index that includes prices of final goods and services in
GDP but removing the effect of inflation
Real GDP: Adjusting GDP for Price Changes - Answer- Generally, prices rise over time.
Therefore, if we do not take this into account when measuring GDP and trying to make
historical comparisons, we will likely overestimate increases in GDP. Nominal GDP is
calculated by aggregating the market value (price times quantity) of goods and services
produced in a country during a given time period. The prices used are those at the time
GDP is calculated.
