# Macroeconomics Study Set 62

## Quiz 5 :An Introduction to Macroeconomics

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You probably use "aggregates" frequently in everyday discussions. Try to think of some examples. (Here is one: Have you ever said, "The students at this college generally think..." What, precisely, did you mean )
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Examples of aggregates in day-to-day life
• Audience watching basket ball generally think that their respective countries will win the match.
• The producer of pizzas generally believes that, if the price of price of pizza goes down, more people will prefer to buy pizza.

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Give some reasons why gross domestic product is not a suitable measure of the well-being of the nation. (Have you noticed newspaper accounts in which journalists seem to use GDP for this purpose )
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GDP (Gross Domestic Product)
GDP is the monetary value of final goods and services produced by the country in a particular period.
GDP is not a measure of well-being
GDP is not a suitable measure of well-being of the nation. The following reasons elucidate the same in detail:
• GDP involves measuring the monetary prosperity of the country. Measurement of GDP does not include the parameters of literacy rate, standard of living, life expectancy, medical assistance, and so on.
• GDP does not measure the traditional value and cultural strength of a country; it fails to measure the knowledge wealth of the country.
• GDP fails to include the artistry knowledge of the country.
• GDP does not measure the leisure and recreations, which is also a part of well-being.
• GDP does not measure the happy living of the people in the country; where, this is also a quotient that accounts the well-being of the nation.
• GDP does not measure the agricultural produce consumed by a country. Similarly, it does not measure the produce consumed by the producers.
Conclusively, GDP is a measure where it projects the economic wealth of a country by means of volume of output. It fails to measure the welfare status of the economy.
Thus, GDP is not the measure of well-being.

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Which of the following transactions are included in gross domestic product, and by how much does each raise GDP a. Smith pays a carpenter $50,000 to build a garage. b. Smith purchases$10,000 worth of materials and builds himself a garage, which is worth $50,000. c. Smith goes to the woods, cuts down a tree, and uses the wood to build himself a garage that is worth$50,000. d. The Jones family sells its old house to the Reynolds family for $400,000. The Joneses then buy a newly constructed house from a builder for$500,000. e. You purchase a used computer from a friend for $200. f. Your university purchases a new mainframe computer from IBM, paying$25,000. g. You win $100 in an Atlantic City casino. h. You make$100 in the stock market. i. You sell a used economics textbook to your college bookstore for $60. j. You buy a new economics textbook from your college bookstore for$100.
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Gross Domestic Product (GDP)
GDP is the total monetary value of final goods and services produced in a given country in a particular time framework.
The calculation of GDP takes into account only the monetary value of final goods and services produced in an economy and it does not take into account the value of intermediate goods and services, to avoid double-counting.
a. The transaction would be added in GDP
If smith pays $50,000 to the carpenter to build a garage, then the value of GDP would be increased by$50,000.
b. GDP would be increased by $10,000 If smith purchases raw material worth of$10,000 and builds himself a garage worth of $50,000 then GDP would increase by$10,000. This is because the remaining $40,000 value of services rendered by the smith is not taken into the account of GDP. c. The given transaction will not be included in GDP GDP does not include a transaction which is not a part of the production activity. Since, a garage built by smith for himself is not considered as a production activity, and it will not be included in the calculation of GDP. d. GDP will be raised by$ 500,000
Selling of an old house is not included in the calculation of GDP of the country because it leads to the problem of double-counting. On the other hand, if Joneses buy a new house for $500,000, the level of GDP will be increased by$500,000.
e. GDP will not be affected
Purchase of an old computer from a friend will not be included in GDP.
f. GDP will be increased by $25,000 Purchase of a new frame computer worth$25,000 will increase the level of GDP by $25,000. g. GDP will not be affected Prize won in Atlantic City casino will not be included in the calculation of GDP. h. GDP will not be affected A$100 profit made out of stock market investment will not be included in the calculation of GDP.
i. GDP will not be affected
Sale of old economics book will not be included in the calculation of GDP. Hence, GDP will not be affected by this transaction.
j. GDP will increase by $100 Purchase of a new economics book worth$100 will increase the level of GDP by \$100.

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Try asking a friend who has not studied economics in which year he or she thinks prices were higher: 1870 or 1900 1920 or 1940 (In both cases, prices were higher in the earlier year.) Most people think that prices have always risen. Why do you think they have this opinion
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