Final Exam Essay

14003 Words May 16th, 2015 57 Pages
CHAPTER 21 (tracking us economy)

1. (National Income Accounting) Identify the component of aggregate expenditure to which each of the following belongs: a. A U.S. resident’s purchase of a new automobile manufactured in Japan b. A household’s purchase of one hour of legal advice c. Construction of a new house d. An increase in semiconductor inventories over last year’s level e. A city government’s acquisition of 10 new police cars.

a. Net exports b. Consumption c. Investment d. Investment e. Government purchases •
2. (National Income Accounting) Define gross domestic product. Determine whether each of the following would be included in the 2007 U.S. gross domestic product: a. Profits
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If the intermediate goods and services were also counted directly, they would be counted twice in GDP, once as themselves and again as part of the price of the final good or service. However, intermediate goods and services that are produced in a given year—but not yet processed and resold to become part of a final good or service—must be included directly in GDP. These intermediate goods and services become part of the firms’ inventories and, thus, part of the investment component of GDP. •
4. (Leakages and Injections) What are the leakages from and injections into the circular flow? How are leakages and injections related in the circular flow?

Leakages include net taxes, saving, and imports. Injections consist of investment spending, government purchases, and exports. In equilibrium, leakages from the circular flow equal injections into the circular flow.

5. (Investment) In national income accounting, one component of investment is net changes in inventories. Last year’s inventories are subtracted from this year’s inventories to obtain a net change. Explain why net inventory increases are counted as part of GDP. Also, discuss why it is not sufficient to measure the level of inventories only for the current year. (Remember the difference between stocks and flows.)

• First, inventories are a stock, not a flow. Some of

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