Question 1

Caroline is an artist. She purchases canvases, paints, brushes, and accessories for $75. She sells one of her original paintings to an art gallery for $1,500, which, in turn, sells it to an art lover for $4,500. How much market value does the gallery add?

Accepted Answer

The market value that the art gallery adds is the difference between the price they sold Caroline's painting for and the price they bought it for.

The art gallery bought the painting from Caroline for $1,500 and sold it for $4,500, which means they added a market value of $3,000 ($4,500 - $1,500).

Therefore, the best choice is C, $3,000.

Question 2

People complain that inflation increases the cost of goods and services and therefore reduces their purchasing power. If inflation and income grow at the same rate, is this complaint valid? Explain carefully.

Accepted Answer

The answer of People complain that inflation increases the cost...

Question 3

High-income countries such as the United States spend a greater amount on services as compared to goods.

Accepted Answer

High-income countries tend to have a higher proportion of their economy based on services, such as healthcare, education, and professional services, rather than goods, such as manufacturing and agriculture. This is due to factors such as technological advancement, globalization, and changes in consumer preferences. In the United States, for example, services account for about 80% of GDP.

Question 4

Why do we not count the value of intermediate goods and services in gross domestic product? Does the value of intermediate goods and services show up in gross domestic product? If so, how?

Accepted Answer

The answer of Why do we not count the value...

Question 5

Emily is a writer, and uses her tablet computer to write a 500-page novel that she sells to a publishing company for $500,000. If the publisher prints 1 million copies that sell for $25 each, what is the contribution to GDP of Emily's novel?

Accepted Answer

The contribution to GDP includes the value added at each stage of production. Emily's novel creates value added in the form of her writing and the publisher's printing and distribution. The value added by Emily's writing is the $500,000 she earned from the sale of her novel. The value added by the publisher is the difference between the revenue they earned from selling the books ($25 million) and the cost of production (which includes the cost of printing, distribution, and any royalties paid to Emily). Since we don't know the exact cost of production, we can approximate it as 50% of the revenue, which would give a value added of $12.5 million. Therefore, the total contribution to GDP is $500,000 + $12.5 million = $13 million. However, since the question asks for the contribution specifically from Emily's novel, we can simply use the revenue from book sales, which is $25 million.

Question 6

Residential investment includes spending by firms on office buildings.

Accepted Answer

Residential investment refers specifically to spending on residential buildings such as single-family homes, apartment complexes, and condos, not office buildings.

Question 7

Caroline is an artist. She purchases canvases, paints, brushes, and accessories for $75. She sells one of her original paintings to an art gallery for $1,500, even though an art lover would pay $4,500 for that painting. How much market value does Caroline add?

Accepted Answer

Caroline's initial investment of $75 is not considered market value. The market value she adds is the difference between what the art gallery paid for the painting ($1,500) and what an art lover would have paid for it ($4,500). Therefore, Caroline adds a market value of $1,425.

Question 8

Table 19-8
 
-Refer to Table 19-8. Suppose that a simple economy produces only four goods and services: sweaters, CDs, sugar, and soft drinks. Assume one half of the sugar is used in making the soft drinks and the other half of the sugar is purchased by households. Calculate nominal GDP for this simple economy.

Accepted Answer

The answer of Table 19-8
 
-Refer to Table 19-8. Suppose...

Question 9

Table 19-7
 
-Refer to Table 19-7. Suppose that a simple economy produces only four goods and services: iPods, t-shirts, bottled water, and oranges. Calculate nominal GDP for this simple economy.

Accepted Answer

The answer of Table 19-7
 
-Refer to Table 19-7. Suppose...

Question 10

If Gladys sells her 2003 Jeep Cherokee for $3,500 in 2018, the sale of her car contributes $3,500 to 2018 GDP.

Accepted Answer

The sale of a used car does not contribute to GDP as it is a transfer of an existing asset and not a newly produced good or service. Only the sale of new cars would contribute to GDP.

Question 11

In the circular flow diagram, the value of all the income in the economy is greater than the value of goods and services produced in the economy.

Accepted Answer

In the circular flow diagram, the value of goods and services produced in the economy (measured by GDP) is equal to the total income earned by households and businesses engaged in production. Therefore, the value of income in the economy cannot be greater than the value of goods and services produced.

Question 12

The circular flow diagram shows that

Accepted Answer

The circular flow diagram illustrates the flow of goods, services, money, and resources between households and firms in the economy. One of the main features of the diagram is that the value of total income earned by households is equal to the total value of expenditures on final goods and services produced by firms. This means that every dollar of income earned by households is ultimately spent on goods and services, which generates revenue and profits for firms. In turn, firms pay wages, salaries, and other income to households, which completes the circular flow of income and expenditures. Therefore, choice A is the correct answer.

Question 13

If the value added of a firm is positive, will the firm necessarily have positive profits?

Accepted Answer

The answer of If the value added of a firm...

Question 14

Why do we subtract import spending from total expenditures?

Accepted Answer

The answer of Why do we subtract import spending from...

Question 15

The circular flow of income shows that GDP can be measured as the sum of wages, interest, rent, and profits received by households or total expenditures on goods and services by households, firms, government, and the rest of the world.

Accepted Answer

The circular flow of income model shows the flow of goods and services between households and firms, and the flow of money in the form of wages, interest, rent, and profits between firms and households. The model also includes government and foreign sectors, with the total expenditures of all sectors being equal to the total income of all sectors, which is equal to the GDP. Therefore, it is true that GDP can be measured as the sum of wages, interest, rent, and profits received by households or total expenditures on goods and services by households, firms, government, and the rest of the world in the circular flow of income model.

Question 16

Debbie makes porcelain plates in her home and sells them to the Opus gallery. She spent $400 last month on supplies and made 50 plates. She sold the plates to the gallery at $25 per plate. The gallery sells all the plates for $40 each. For all of the 50 plates, what is Debbie's total value added? For all the 50 plates, what is the gallery's total value added?

Accepted Answer

The answer of Debbie makes porcelain plates in her home...

Question 17

Government spending on transfer payments is included in government purchases when calculating GDP because it results in the production of new goods and services.

Accepted Answer

Transfer payments do not result in the production of new goods and services, and therefore they are not included in government purchases when calculating GDP.

Question 18

Describe briefly how the final value of an iPhone which costs $700 must be equal to the sum of incomes generated by the production of the iPhone.

Accepted Answer

The answer of Describe briefly how the final value of...

Question 19

How can a firm have a negative valued added, as supposedly some state-owned businesses did in the former Soviet Union? What has to be true for value added to be negative?

Accepted Answer

The answer of How can a firm have a negative...

Question 20

The Bureau of Economic Analysis divides it's statistics on GDP into four major categories. List the categories of expenditures and define each.

Accepted Answer

The answer of The Bureau of Economic Analysis divides it's...

Quiz 19: Gdp: Measuring Total Production and Income