EC140 Chapter Notes - Chapter 20: Gross Domestic Product, Investment Goods, Retained Earnings

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Some firms produce outputs that are used as inputs for others. Other firms produce other outputs that are used as inputs by more. Intermediate goods all outputs that are used as inputs by other producers in a further stage of production. Final goods goods that are not used as inputs by other firms but are produced to be sold for consumption, investment, government, or export during the period under consideration. Note: addi(cid:374)g up all of the (cid:374)atio(cid:374)"s sales of output (cid:449)ould (cid:271)e i(cid:374)(cid:272)o(cid:396)(cid:396)e(cid:272)t, (cid:373)ust add based on type. One firm does not know if the output they sell would be resold as the same or a new output (therefore cannot solve double counting this way) To avoid double counting: value added is used the (cid:448)alue of a fi(cid:396)(cid:373)"s output minus the value of the input that it purchases from other firms. Value added= sales revenue cost of intermediate goods = payments.

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Intermediate goods are goods and services that are purchased for resale or for further processing or manufacturing. Final goods are consumer goods, capital goods, and services that are purchased by their final users, rather than for resale or for further processing or manufacturing. Including the value of intermediate goods in the measure of real GDP would amount to multiple counting, and therefore distort the value of GDP. Value added is the market value of a firm’s output less the value of the inputs the firm has bought from others.

Using the table below, calculate the total sales values, value-added, and fill in the missing boxes. The product is assembled for sale is a fancy wool suit.

Stages of Production	Sales Value of Materials or Product	Value Added
	$0
Firm A: Sheep Ranch		$120
Firm B: Wool Processor	$180
Firm C: Suit Manufacturer	$220
Firm D: Clothing Wholesaler		$50
Firm E: Retail Clothier (Market)		$80
Total Sales Value
Total Value Added

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Part I. Multiple Choice Questions. Please circle the right answer (one mark each)

1. Which of the following are economic goods?

a. Atlantic Ocean sea water.

b. Iowa farm land.

c. California coast line.

d. All of the above.

e. All of the above, except a.

2. The three fundamental questions of economic organization are:

a. closely related to the concept of scarcity.

b. not nearly as important today as they were at the dawn of civilization.

c. what, how, and why.

d. land, labor, and capital.

e. all of the above.

3. Which of the following statements applies to a mixed economy?

a. There is confusion and a lack of organization.

b. The allocation of resources changes from production period to production period.

c. There are no real examples of truly mixed economies.

d. Mixed economies include aspects of both market and command economies.

e. None of the above statements apply.

4. Capital is:

a. the same as money.

b. the headquarters of economic planning.

c. both an input and an output.

d. all of the above.

e. none of the above.

5. Land, labor, and capital are:

a. available only in finite amounts.

b. used to produce outputs.

c. the primary factors of production.

d. combined with technology in the production process.

e. all of the above.

6. Which of the statements below does not apply to the production-possibility frontier, or PPF?

a. The PPF is closely related to the concept of scarcity.

b. Quantities of inputs are measured along the axes of the PPF.

c. The PPF may shift over time.

d. Movements along the PPF may occur as the allocation of resources changes.

e. Technology may change the shape of the PPF.

7. Which of the statements below is a reason why an economy might produce a level of output that is beneath its production-possibility frontier?

a. The available resources are not equally suited to the production of both outputs.

b. The available body of technological knowledge is not being fully utilized.

c. Society prefers one product over the other.

d. In reality, economies produce thousands of goods not just two.

e. There are no frontiers left anymore.

8. In order to shift the PPF out (above and to the right), an economy would have to:

a. somehow increase its stock of inputs.

b. remove some incompetent bureaucrats from their jobs.

c. eliminate the sources of significant abuse of monopoly power.

d. all of the above.

e. none of the above.

9. Sana notices that no matter how many paper cups she buys, she always pays the same price per cup. This means that the supply curve which confronts her is:

a. perfectly inelastic.

b. perfectly elastic.

c. unit-elastic.

d. elastic, but not necessarily perfectly elastic.

e. none of these things, necessarily

10. A perfectly inelastic supply curve would be shown in the ordinary supply-and-demand graph as a:

a. vertical line.

b. horizontal line.

c. straight line, but neither horizontal nor vertical.

d. curved line.

e. any of the above.

1. The cost-benefit approach to deciding whether or not to undertake any activity argues that you should engage in the activity if:
a. The marginal cost of the activity exceeds the marginal benefit of the activity.
b. The marginal benefit of the activity exceeds the marginal cost of the activity.
c. There are benefits associated with the activity
d. There are costs associated with the activity

2. In the circular flow model, the household sector:
a. Demand goods and services in output markets, while the business sector supplies them.
b. Supplies goods and services in output markets, while the business sector demands them.
c. Demands and supplies goods and services in output markets.
d. Neither demands nor supplies goods and services in output markets.

3. In resource markets, households operate on the ________ side and business firms operate on the ______ side; these activities represent ______for households and _______ for business firms.
a. Demand; supply; income; revenue
b. Demand; supply; expenditures; revenue
c. Supply; demand; expenditures; costs
d. Supply; demand; income; costs

4. Ice cream sales and the incidence of polio were strongly correlated prior to the development of the polio vaccine. Assuming that eating ice cream caused polio is an example of the:
a. Fallacy of composition
b. Fallacy of division
c. Fallacy of false cause
d. Fallacy of ceteris paribus

5. Assuming that everyone is better off when a bridge is built in Alaska to serve a small community is an example of the:
a. Fallacy of composition
b. Fallacy of division
c. Fallacy of false cause
d. Fallacy of ceteris paribus

6. A production possibilities frontier for two outputs is drawn assuming that:
a. Opportunity cost is fixed, but the quantity and quality of resources changes
b. Both outputs use the same quantity of each resource, but the technology differs
c. The amount of resources currently available for production is fixed
d. The technology available can only be applied to producing one of the outputs

7. When wants and needs exceed the resource available to satisfy them:
a. Scarcity exists and society must rely on the government to allocate resources.
b. Scarcity exists and society must rely on free markets to allocate resources.
c. Scarcity exists and decisions must be made about how to allocate limited resources among competing uses.
d. Scarcity does not exist so it is not necessary to allocate resources.

8. If Carl is able to produce a greater number of baskets per hour than Sheila, then:
a. Carl cannot have a comparative advantage in the production of baskets
b. Carl has an absolute advantage in the production of baskets
c. Sheila has an absolute advantage in the production of baskets
d. Sheila has a comparative advantage in the production of baskets

9. If Carl's opportunity cost per basket is 4 bowls, but Sheila's opportunity cost per basket is 3 bowls, then:
a. Carl has a comparative advantage in the production of baskets
b. Carl has an absolute advantage in the production of baskets
c. Sheila has an absolute advantage in the production of baskets
d. Sheila has a comparative advantage in the production of baskets

10. Which of the following is not an example of the factor of production or economic resource referred to as capital?
a. An office building
b. Computers used by a tax preparation business
c. Lawnmowers owned by a landscaping firm
d. Money used to start a new business.

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EC140 Chapter Notes - Chapter 20: Gross Domestic Product, Investment Goods, Retained Earnings

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