Chapter 7

Question 1

gross domestic product (GDP)

Answer 1

the total market value of all final goods and
services produced within a society over a certain period of time

Question 2

intermediate good

Answer 2

a good used in the production process that is not a final good
or service

Question 3

consumption expenditures

Answer 3

purchases of newly produced goods and services
by households (denoted by C )

Question 4

private investment expenditures

Answer 4

purchases of newly produced goods and
services by firms (e.g., spending on new plants and equipment) (denoted by I )

Question 5

government purchases

Answer 5

purchases of newly produced goods and services by
local, state, or federal government (denoted by G )

Question 6

import

Answer 6

a good or service produced in a foreign country and purchased by
someone in the home country

Question 7

export

Answer 7

a good or service produced in the home country and sold in a
foreign country

Question 8

net export

Answer 8

exports minus imports (denoted by NX )

Question 9

trade deficit

Answer 9

the excess of imports over exports

Question 10

trade surplus

Answer 10

the excess of exports over imports

Question 11

real GDP

Answer 11

the value of GDP computed using prices from an arbitrary base year (i.e.,
a measure of GDP that controls for changes in prices, since across different periods
goods/services are valued at common, constant prices)

Question 12

nominal GDP

Answer 12

the value of GDP computed using current period prices

Question 13

real GDP per capita

Answer 13

value of real GDP divided by total population of the country

Question 14

Industrially Advanced Countries (IACs)

Answer 14

high income countries with primarily
market based economies, large stocks of technologically advanced industrial capital,
and a highly educated and skilled workforce (e.g., U.S., Norway, Australia,
Germany, Japan)

Question 15

Less Developed Countries (LDCs)

Answer 15

lower income countries which are held
back by some combination of poor economic institutions, undeveloped industrial
capital, and/or an uneducated and unskilled workforce (e.g., India, Ghana,
Bangladesh, and the Democratic Republic of the Congo)

Question 16

economic development

Answer 16

improvements over time in a society’s quality of life
and living standards
▪ by definition, very qualitative in nature
▪ includes, but not limited to, increased consumption of material goods/services

Question 17

economic growth

Answer 17

sustained increases over time in a society’s value of Real GDP
▪ graphically illustrated by an outward shift of the PPF
▪ measured quantitatively as the percentage increase in Real GDP

Question 18

GDP growth rate

Answer 18

annual percentage change in the value of real GDP

Question 19

catch-up effect

Answer 19

conjecture that (all other factors fixed) the growth rates of less
developed countries will exceed the growth rates of developed countries, allowing the
less developed countries to “catch up” over time

Question 20

Rule of 72

Answer 20

the observations that a variable that grows at a constant rate of “X%
per period” will double in value in approximately “(72/X) periods”

Question 21

physical capital

Answer 21

machines, building, factories, and other equipment used in
the production process

Question 22

human capital

Answer 22

the knowledge, education, skills, experience, work ethic,
inter- personal skills, and other attributes of workers which determine
productivity

Question 23

technology

Answer 23

the application of scientific and engineering principles to the
problem of production

Question 24

vicious cycle of poverty hypothesis

Answer 24

conjecture that poor countries will
remain poor since they do not have sufficient resources available to make the
investments in capital which are necessary for economic growth

Question 25

capital flight

Answer 25

tendency for wealthy people in poor countries to invest their
financial capital abroad instead of at home

Question 26

brain drain

Answer 26

tendency for the most highly talented people from developing
countries to become educated and then move to an already wealthy country

Question 27

Rule-of-Law

Answer 27

environment in which property rights and contracts are
respected and administered fairly and transparently, without favoritism
▪ countries lacking rule-of-law have difficulty achieving growth

Question 28

crony capitalism

Answer 28

environment in which well-connected unscrupulous
business people use corrupt political systems to their advantage in order to
obtain preferential treatment from government (e.g., government contracts,
subsidies, bailouts, tax loopholes)
▪ in such an environment, the efficient use of resources is distorted to
the detriment of economic growth
* Government ownership/control of productive resources (i.e., a reliance
on planning instead of markets, socialism instead of capitalism)
▪ government ownership of resources removes profit motive => reduced
incentive to create value and innovate to reduce costs (dampening
economic growth)