1 - Definitions

Question 1

Aggregate output

Answer 1

Measured in GDP.

Question 2

Way 1 of defining GDP

Answer 2

GDP is the value of final goods and services produced in the economy during a given period, count only final goods, not intermediate goods

Question 3

Way 2 of defining GDP

Answer 3

GDP is the sum of value added in the economy during a given period

Question 4

value added by a firm

Answer 4

the value of its production minus the value
of the intermediate goods used in production

Question 5

way 3 of defining GDP

Answer 5

GDP is the sum of the incomes n the economy during a given period. aggregate production and aggregate income are always equal

Question 6

Nominal GDP

Answer 6

the sum of the quantities of final goods produced times
their current price

Question 7

Nominal GDP increases when…

Answer 7

1) the production of most goods increases. 2) the price of most goods increases

Question 8

Real GDP

Answer 8

the sum of quantities of final goods times constant (not current) prices

Question 9

Nominal GDP is also called

Answer 9

Dollar GDP, or GDP in current dollars

Question 10

GDP is also called

Answer 10

GDP in terms of goods, GDP in constant
dollars, GDP adjusted for inflation, or GDP in 2009 dollars

Question 11

Intermediate good

Answer 11

used in production of another good

Question 12

recession

Answer 12

negative GDP growth

Question 13

expansion

Answer 13

positive GDP growth

Question 14

synchronisation

Answer 14

two countries GDP growth is interrelated

Question 15

cyclical variables

Answer 15

variables that have a positive correlation

Question 16

Reason 1 why measuring GDP is difficult

Answer 16

A tough problem in computing real GDP is how to deal with changes in the quality of existing goods. One of the most difficult cases is computers

Question 17

Reason 2 why measuring GDP is difficult

Answer 17

The price for services from Facebook, YouTube, Wikipedia, Google is practically zero. eg. move from paid calls to Skype calls looks like less GDP because less money is spent

Question 18

Reason 3 why measuring GDP is difficult

Answer 18

Many activities may be legal in some countries but illegal in others (e.g., prostitution, drugs)

Question 19

Reason 4 why measuring GDP is difficult

Answer 19

only housing services are included eg. hired cleaners rather than unpaid housework

Question 20

Solution for Reason 1

Answer 20

look at how the market values computers with different characteristics in a given year, treats goods as providing a collection of characteristics – here speed, memory and so on – each with their own price, is called hedonic pricing

Question 21

Example of hedonic pricing

Answer 21

The quality of new laptops has increased on average by 18% a year since 1995, while their dollar price has declined by about 7% a year

Question 22

employment

Answer 22

the number of people who have a job

Question 23

unemployment

Answer 23

the number of people who do not have a job but have been looking for one in the last 4 weeks

Question 24

labour force

Answer 24

the sum of employment and unemployment

Question 25

unemployment rate =

Answer 25

unemployment / labour force

Question 26

unemployment rate

Answer 26

the ratio of the number of people who are unemployed to the number of people in the labour force

Question 27

what do most rich countries rely on to compute the unemployment rate

Answer 27

large surveys

Question 28

the US Current Population System relies on

Answer 28

interviews of 60,000 households every month

Question 29

Those who do not have a job and are not looking for one are counted as

Answer 29

not in the labour force

Question 30

discouraged workers

Answer 30

those who give up looking for a job and so are no longer counted as unemployed

Question 31

participation rate

Answer 31

s the ratio of the labour force to the total population of working age

Question 32

Reason 1 for economists to care about unemployment

Answer 32

Direct effect on the welfare of the unemployed, especially those remaining unemployed for long periods of time

Question 33

Reason 2 for economists to care about unemployment

Answer 33

a signal that the economy is not using its human resources efficiently

Question 34

Very low unemployment can be a problem because

Answer 34

the economy runs into labour shortages and employers need to pay higher wages, which may raise prices and raise inflation

Question 35

inflation

Answer 35

a sustained rise in the general level of prices

Question 36

inflation rate

Answer 36

the rate at which the price level increases

Question 37

deflation

Answer 37

a sustained decline in the price level eg Japan

Question 38

GDP deflator =

Answer 38

Pt = Nominal GDP/Real GDP

Question 39

GDP deflator

Answer 39

the ratio of nominal GDP to real GDP in a year

Question 40

rate of inflation=

Answer 40

the rate of change in GDP deflator

Question 41

nominal GDP =

Answer 41

rate of inflation + rate of growth of real GDP

Question 42

Reason 1 why the set of goods produced in the economy is not the same as the set of goods purchased by consumers

Answer 42

some goods in the GDP are sold not to consumers but to firms, to the government, or the foreigners

Question 43

Reason 2 why the set of goods produced in the economy is not the same as the set of goods purchased by consumers

Answer 43

Some of the goods brought by consumers are not produced domestically but are imported from abroad

Question 44

Consumer Price index -

Answer 44

a measure of the cost of living (and of the cost of the consumption basket of a typical consumer)

Question 45

CPI is published monthly by...

Answer 45

Bureau of Labour Statistics (BLS), which collects price data for 211 items in 38 cities

Question 46

CPI gives the cost in dollars of ...

Answer 46

a specific list of goods and services over time

Question 47

CPI and GDP deflator are ...

Answer 47

largely similar, move together most of the time

Question 48

Exception of CPI and GDP deflator moving together

Answer 48

in 1979 and 1980, the increase in the CPI was significantly larger than the increase in the GDP deflator due to the price of imported goods increasing relative to the price of domestically produced goods

Question 49

Reason 1 why economists care about inflation

Answer 49

– Inflation affects income distribution when not all prices and wages rise proportionally

Question 50

Reason 2 why economists care about inflation

Answer 50

Inflation leads to distortions due to uncertainty and because of its interaction with taxation

Question 51

Inflation interaction with taxation

Answer 51

higher wages to match inflation means move up to higher tax bands and pay more taxes

Question 52

Most economists believe the “best” rate of inflation to be

Answer 52

a low and stable rate of inflation between 1 and 4%