Question 1

To calculate GDP using the value-added method, one would add up

Accepted Answer

The value-added method adds up the value added by each firm involved in the production of final goods and services. This means that the value added at each stage of production, from raw materials to finished product, is included in the calculation of GDP. Intermediate goods and services (option D) are not included because they have already been accounted for in the value added by the firms that produced them. The market value of final goods and services (option A) is a component of GDP, but the value-added method focuses on the value added by each producer rather than the final market value. The underground economy (option B) is not included in official GDP calculations, regardless of the method used.

Question 2

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 3

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

Accepted Answer

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Question 4

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

Accepted Answer

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Question 5

Residential investment includes spending by firms on office buildings.

Accepted Answer

Residential investment specifically refers to spending on construction, improvement, and purchase of homes and apartments, not office buildings.

Question 6

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

The value of all the income in the economy is equal to the value of goods and services produced in the economy in the circular flow diagram. This is because all the income earned by households through factors of production is used to purchase goods and services from firms, which ultimately creates a balance between income and output.

Question 7

Caroline is an artist. She purchases canvas, 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 value does Caroline add?

Accepted Answer

Caroline adds the value of the materials and accessories she used to create the painting, which is $75. However, the painting's value increases significantly when she sells it for $1,500 to the art gallery. Even though an art lover would pay $4,500 for the painting, the value Caroline adds is the difference between the cost of materials and the price she sells it for to the gallery, which is $1,425. Therefore, the best choice is B.

Question 8

The circular flow diagram shows that

Accepted Answer

The circular flow diagram illustrates the flow of money and goods in an economy. It shows that the total value of expenditures on final goods and services in the economy is equal to the total income earned by households. This is because every dollar spent by households ultimately goes to firms, who in turn use that money to pay wages and purchase inputs for production, creating income for households. As a result, the total value of expenditures on final goods and services is equal to the total income earned by households.

Question 9

Emily is a writer. She buys pens and paper for $20 and writes 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 of Emily's novel includes the value of the final product (1 million copies sold at $25 each) and the value of intermediate goods used in the production process (pens and paper bought for $20). The value of the final product is $25 million (1 million copies sold at $25 each). The value of intermediate goods is typically not included in calculations of GDP, but in this case, it is necessary to include it to accurately measure the entire contribution of Emily's novel to GDP. Therefore, the best choice is A) $25 million.

Question 10

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, so they are not included in government purchases which are used to calculate GDP.

Question 11

Which of the following would not be included in the expenditure category called investment expenditures?

Accepted Answer

Investment expenditures in economic terms refer to spending on capital goods, not financial investments like stocks. Purchases of shares of preferred stock are financial transactions and do not count as investment in the context of GDP calculations.

Question 12

If Gladys sells her 1998 Jeep Cherokee for $3,500 in 2013, the sale of her car contributes $3,500 to 2013 GDP.

Accepted Answer

The sale of a used car is not included in GDP as it does not represent current production. GDP only counts the value of new goods and services produced within a country's borders during a specific time period.

Question 13

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

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Question 14

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

Accepted Answer

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Question 15

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 highly developed service-based economies, where services such as healthcare, education, finance, and professional consulting comprise a significant portion of their GDP. In contrast, low-income countries tend to have economies that are more focused on producing and exporting goods, such as agriculture or manufacturing.

Question 16

Why do we subtract import spending from total expenditures?

Accepted Answer

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Question 17

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

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Question 18

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 illustrates the flow of money, resources, and goods and services between different sectors of the economy. It shows that GDP can be measured either as the total income earned by households (wages, interest, rent, and profits) or as the total expenditures on goods and services by all economic agents (households, firms, government, and foreign sector). Both methods should yield the same measure of GDP.

Question 19

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 20

Caroline is an artist. She purchases canvas, 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 value does the gallery add?

Accepted Answer

The value that the art gallery adds is the difference between what they purchased the painting for ($1,500) and what they sold it for ($4,500), which is $3,000.

Quiz 19: GDP: Measuring Total Production and Income