Answer Key Quiz 1
Quiz #1 September 8, 2014 Name: Answer Key
(1) For each of the following goods and services, identify if the good or service is counted in U.S. Gross Domestic Product (GDP) and provide a short explanation defending your decision.
a. Household work completed by a maid (2 points).
This service is included in GDP because the service is legal and has a market value.
b. Milk bought by a bakery for use in the baking of donuts (2 points).
The good is not included in GDP because it is an intermediate good.
c. Pre-owned clothes purchased at Plato's Closet (2 points).
The good is not included in GDP because GDP only counts the production of a good, not the reselling of a good.
d. A Samsung Galaxy produced in a factory located in Kentucky (2 points).
The good is included in GDP as it is produced in the United States.
(2) In the article The Trade-Balance Creed Debunking the Belief that Imports and Trade Deficits are a "Drag on Growth,” Daniel Griswold provides two reasons why imports do not reduce GDP. Briefly explain both of the reasons. (2 points)
(1) GDP measures the market value of production within a country. Imports, by definition are goods and services made outside the country. However, the BEA measures GDP by estimating expenditures and then inferring domestic production. Since some of the spending on C, I, and G are on imports, the BEA needs to subtract spending on imports to accurately reflect domestic production. If imports are not subtracted, domestic production is overestimated.
(2) Some imports are inputs in domestic production. Therefore, stopping these imports will reduce domestic production. Consider the example of oil. Oil is a major component in many industrial manufacturing sectors. If the U.S. stopped importing oil, energy costs would increase because the U.S. does not produce enough energy to satisfy domestic demand. These higher energy costs would lower production, thus lowering GDP.
(1) For each of the following goods and services, identify if the good or service is counted in U.S. Gross Domestic Product (GDP) and provide a short explanation defending your decision.
a. Household work completed by a maid (2 points).
This service is included in GDP because the service is legal and has a market value.
b. Milk bought by a bakery for use in the baking of donuts (2 points).
The good is not included in GDP because it is an intermediate good.
c. Pre-owned clothes purchased at Plato's Closet (2 points).
The good is not included in GDP because GDP only counts the production of a good, not the reselling of a good.
d. A Samsung Galaxy produced in a factory located in Kentucky (2 points).
The good is included in GDP as it is produced in the United States.
(2) In the article The Trade-Balance Creed Debunking the Belief that Imports and Trade Deficits are a "Drag on Growth,” Daniel Griswold provides two reasons why imports do not reduce GDP. Briefly explain both of the reasons. (2 points)
(1) GDP measures the market value of production within a country. Imports, by definition are goods and services made outside the country. However, the BEA measures GDP by estimating expenditures and then inferring domestic production. Since some of the spending on C, I, and G are on imports, the BEA needs to subtract spending on imports to accurately reflect domestic production. If imports are not subtracted, domestic production is overestimated.
(2) Some imports are inputs in domestic production. Therefore, stopping these imports will reduce domestic production. Consider the example of oil. Oil is a major component in many industrial manufacturing sectors. If the U.S. stopped importing oil, energy costs would increase because the U.S. does not produce enough energy to satisfy domestic demand. These higher energy costs would lower production, thus lowering GDP.