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Exam 20: Measuring a Nations Well-Being

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Question 31

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Using the outline below, draw a circular-flow diagram representing the interactions between households and firms in a simple economy. Explain briefly the various parts of the diagram.

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This diagram should duplicate the essent...

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Question 32

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For an economy as a whole,

A) wages must equal profit.
B) consumption must equal saving.
C) income must equal expenditure.
D) the number of buyers must equal the number of sellers.

E) None of the above
F) B) and C)

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Question 33

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Suppose that population grows by 2 per cent. For the standard of living to rise, which of the following must occur?

If nominal GDP in 2015 exceeds nominal GDP in 2014, real output must have risen.

UK Gross Domestic Product (in contrast to Gross National Product) measures the production and income of

The production of an apple contributes more to GDP than the production of a gold ring because food is necessary for life itself.

Changes in the GDP deflator reflect only changes in the prices of goods and services.

Explain why it is the case that the value of intermediate goods produced and sold during the year is not included directly as part of GDP, but the value of intermediate goods produced and not sold is included directly as part of GDP.

Assume net exports are €-220, consumption is €5,000, tax revenues are €1,000, government purchases are €1,500, and 2010 GDP, calculated by the expenditures approach, is €8,000. We can conclude that

GDP may not be a reliable indicator of the standard of living of a country because it does not include:

Households play what role(s) in the circular flow diagram?

The table below contains data for country A for the year 2014. $\begin{array}{|l|l|}\hline \text { Household purchases of durable goods } & € 1293 \\\hline \text { Household purchases of nondurable goods } & € 1717 \\\hline \text { Household purchases of services } & € 301 \\\hline \text { Household purchases of new housing } & € 704 \\\hline \text { Purchases of capital equipment } & € 310 \\\hline \text { Inventory changes } & € 374 \\\hline \text { Purchases of new structures } & € 611 \\\hline \text { Depreciation } & € 117 \\\hline \text { Salaries of government workers } & € 1422 \\\hline \text { Government expenditures on public works } & € 553 \\\hline \text { Transfer payments } & € 777 \\\hline \text { Foreign purchases of domestically produced } & € 88 \\\text { goods } & \\\hline \text { Domestic purchases of foreign goods } & € 120 \\\hline\end{array}$ In 2014 what was country A's: a) GDP in 2010 b) Consumption c) Investment d) Government purchases e) Exports f) Imports g) Net exports

Wages are an example of a transfer payment because there is a transfer of payment from the firm to the worker.

GDP is not a perfect measure of well-being; for example,

In producing a sweater, a man who shears sheep pays a farmer €4 for a sheep's wool. The shearing shop sells the wool to a knitting mill for €7. The knitting mill buys the wool and makes it into a fine fabric and sells it to a sweater-making firm for €13. The sweater-making firm sells the sweater to a clothing store for €20, and the clothing store sells the sweater, gift wrapped, for €50. What is the contribution to GDP of the production and sale of the sweater?

The circular flow model is not used anymore because it fails to perfectly replicate real world situations

GDP per person tells us the income and expenditure of the

Marie grows vegetables in her garden to feed her family. The vegetables she grows are not counted in GDP because

GDP does not make adjustments for leisure time, environmental quality, or volunteer work.

A country with a larger GDP per person generally has a greater standard of living or quality of life than a country with a smaller GDP per person.