Review Sheet for Exam 2

Review Sheet for Exam 2 - 1 ECN 111 Spring Semester, 2008...

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ECN 111 Spring Semester, 2008 Review Sheet for Midterm 2: Chapters 5-9 1. Calculate GDP from the upper loop and lower loops of the circular flow. Upper Loop: C + I + G + X – M Lower Loop: Employee Compensation + Net Interest + Rents + Total Corporate Profits + Proprietor’s Incomes (profits of partnerships and sole proprietorships) + indirect business taxes + depreciation). 2. Calculate incomes earned by resource owners from GDP. GDP – depreciation – indirect business taxes = Incomes Earned by resource owners 3. Calculate DI from GDP GDP – depreciation – indirect business taxes – Corporate Income Taxes – Corporate Retained Earnings – Social Security Taxes paid by employers – personal taxes + transfer payments by government to households = DI. 4. Calculate real GDP from nominal GDP using a price index (PI). Real GDP = [Nominal GDP / (price index)] * 100. If Nominal GDP = $800 and the PI = 200, then real GDP = $400. If Nominal GDP = $600 and the PI = 50, then real GDP = $1200. 5. Calculate the price index if nominal and real GDP for a given year are known. Price index = [Nominal GDP / Real GDP] * 100 If nominal GDP = $600 and real GDP = $300, then the value of the PI = 200. If nominal GDP = $400 and the PI = 80, then real GDP = $500. 6. Which sectors of the economy buy: (a) only final products; (b) both final and intermediate goods? How do final and intermediate goods differ? (Answer: Anything that households, government and the rest-of-the-world sectors buy is counted as final product. The business sector is the only sector that can buy both intermediate and final products. Intermediate goods are things purchased by firm A from firm B and are used up by firm A in producing goods or services during the year. Final products are purchased when what firm A buys from firm B is not used up by firm A in the process of producing goods and services during the year. 7. Are changes in nominal GDP values from year to year a good measure of changes in economic well-being? Discuss the issues involved. (Answer: No, changes in nominal GDP are not a good measure of changes in economic well being. One must also consider changes in prices, changes in the composition of output, changes in the number of households, changes in the distribution of income across households, and changes in production in the non-market sector of the economy. Also, nominal GDP does not adjust for changes in the amount of leisure time available to households. 8. What is the difference between GNP and GDP? (Answer: GDP is the market value of final output produced by domestically located productive factors in a given year. GNP is the market value of final output produced by domestically owned productive factors in a given year. 9.
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Review Sheet for Exam 2 - 1 ECN 111 Spring Semester, 2008...

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