CH 5 SOLUTIONS TO TEXTBOOK PROBLEMS

CH 5 SOLUTIONS TO TEXTBOOK PROBLEMS - CH 5 SOLUTIONS TO...

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CH 5 SOLUTIONS TO TEXTBOOK PROBLEMS Quick Quizzes 1. Gross domestic product measures two things at once: (1) the total income of everyone in the economy; and (2) the total expenditure on the economy’s output of goods and services. It can measure both of these things at once because income must equal expenditure for the economy as a whole. 2. The production of a kilogram of caviar contributes more to GDP than the production of a kilogram of hamburger because the contribution to GDP is measured by market value and the price of a kilogram of caviar is much higher than the price of a kilogram of hamburger. 3. The four components of expenditure are: (1) consumption; (2) investment; (3) government purchases; and (4) net exports. Net exports are equal to the difference between the value of exports and the value of imports. When our country imports more than it exports, net exports are negative. 4. Nominal GDP is the production of goods and services valued at current prices. Real GDP is the production of goods and services valued at constant prices. Real GDP is a better measure of economic well-being because it reflects the economy’s ability to satisfy people’s needs and desires. Thus, a rise in real GDP means people have produced more goods and services, but a rise in nominal GDP could occur either because of increased production and/or because of higher prices. 5. Although GDP is not a perfect measure of economic well-being, policymakers should care about it because a larger GDP means that a nation can afford better health care, better educational systems, and more of the material necessities of life. Questions for Review 1. An economy's income must equal its expenditure, since every transaction has a buyer and a seller. Thus, expenditure by buyers must equal income of sellers. 2. The production of a luxury car contributes more to GDP than the production of an economy car because the luxury car has a higher market value. 3. The contribution to GDP is $3, the market value of the bread, which is the final good that is sold.
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