GDP and Limitations, Real vs Nominal

Question 1

what is the gross domestic product?

Answer 1

the market value of all final goods and services produced within a country in a given year

Question 2

what does the GDP of a country do?

Answer 2

tallies up the value of all the goods and services they produce

Question 3

what is national accounts?

Answer 3

the system used to measure overall output and expenditure in a country

Question 4

3 equivalent ways to measure GDP:

Answer 4

1. Total spending on domestic
   products
2. Total domestic production
   (measured as value added)
3. Total domestic income

Question 5

what are the three perspectives on GDP?

Answer 5

1. total spending
2. total output
3. total income

Question 6

what is the ‘total spending’ perspective on GDP?

Answer 6

-Measure GDP by adding
up every dollar of
spending.

-Highlights who’s doing
the spending, and what
they are buying.

Question 7

what is the ‘total output’ perspective on GDP?

Answer 7

-Measure GDP by adding
up every dollar’s worth
of output produce.

-Highlights what’s being
made, and by whom. It
helps map the structure
of production.

Question 8

what is the ‘total income’ perspective on GDP?

Answer 8

-Measure GDP by adding
up every dollar of
income earned.

-Highlights where income
is going, and who’s
enjoying the fruits of all
the economic activity.

Question 9

what are exports?

Answer 9

goods or services produced domestically and purchased by foreign buyers

Question 10

what are imports?

Answer 10

goods or services produced overseas and purchased by domestic buyers.

Question 11

what is meant by ‘value added’?

Answer 11

the amount by which the value of an item is increased at each stage of production

Question 12

what do green arrows show in the circular flow?

Answer 12

the flow of real resources

Question 13

what do purple arrows show in the circular flow?

Answer 13

show the flow of money

Question 14

what does the circular flow show?

Answer 14

1. The market value of total output must
   be equal to total spending.
2. Total spending must equal total
   income.
   ➢ Total output, total spending, and
   total income are
   all equal.

Question 15

what are the limitations of GDP?

Answer 15

1.Prices are not values.
2. Nonmarket activities —
including household
production — are excluded.
3. The shadow economy is
missing.
4. Environmental degradation
isn’t counted.
5. Leisure doesn’t count.
6. GDP ignores distribution.

Question 16

what is the shadow economy?

Answer 16

the economic activity purposefully conducted out of view of the government, and, thus, excluded from
GDP

Question 17

what is nominal GDP?

Answer 17

GDP measured in today’s prices

Question 18

what is real GDP?

Answer 18

GDP measured in constant
prices.

Question 19

what does the real GDP measurement allow us to do?

Answer 19

to isolate growth in production that has
taken place.

Question 20

how is nominal GDP calculated?

Answer 20

by adding up the market value of total production in a year using the current prices prevailing in that year

Question 21

how is real GDP calculated?

Answer 21

excludes the effects of price changes, so it isolates economic growth that’s due to changes in the quantity of output produced.

Question 22

what does the consumer price index (CPI) measure?

Answer 22

the overall cost of the goods and services bought by a typical consumer

Question 23

what are the five stages to calculating CPI?

Answer 23

1. fix the basket
2. find the prices
3. compute the basket’s cost
4. choose a base year and compute the index
5. compute the inflation rate

Question 24

what are the problems in measuring the cost of thr living through CPIU?

Answer 24

1) Substitution bias
2) Introduction of new goods
3) Unmeasured quality changes

Question 25

what is substitution bias (CPI)?

Answer 25

The basket does not change to reflect consumer reaction to changes in relative prices.

Question 26

what is meant by unmeasured quality changes (CPI)?

Answer 26

• If the quality of a good rises from one year to the next, the value of a
  euro rises, even if the price of the good stays the same.
• If the quality of a good falls from one year to the next, the value of a
  euro falls, even if the price of the good stays the same.
• The CSO/Eurostat try to adjust the price for constant quality, but such
  differences are hard to measure

Question 27

what is indexation?

Answer 27

When some money amount is automatically corrected for inflation by law or contract

Question 28

what is the nominal interest rate?

Answer 28

the interest rate usually reported and not
corrected for inflation.

Question 29

what is the real interest rate?

Answer 29

the nominal interest rate that is corrected for the effects of inflation