3.1 Measuring Economic Activity

Question 1

Macroeconomics Circular Flow

Answer 1

Government Sector, Foreign Sector, Banking Sector

Question 2

Government Sector

Answer 2

The government gets taxes from households and firms (Leakage). These taxes then contribute to government expenditures on public goods (Injections)

Question 3

Foreign Sector

Answer 3

Nations spend money on foreign goods known as imports (Leakage), and then they earn money by selling goods to foreigners known as exports (Injections)

Question 4

Banking Sector

Answer 4

Households and firms save money in the banking sector (Leakage). And then banks provide households and firms with funds for investment

Question 5

Leakage

Answer 5

• Taxes, spendings on imports from other nations, and money saved in banks are all considered
  leakages.
• A leakage is a income that is earned but it not spent on goods and services that aren’t by the
  nation where that income is earned from, therefore making it a leakage

Question 6

Injections

Answer 6

• Government spendings, export revenues, and investments are all considered injections.
• Money that enters from outside of the economy which increases overall economic activity

Question 7

Approaches to Measuring Output (GDP)

Answer 7

Income Approach, Output Approach, Expenditure Approach

Question 8

Expenditure Approach (Measuring GDP)

Answer 8

• Total expenditure = C (Household consumption) + I (investment in capital by firms) + G
  (Government spendings) + Xn (Net exports)

or

• Total expenditure = C + I + G + Xn

Question 9

GDP

Answer 9

GDP = the total value of a nation’s output in a particular period of time

Question 10

Components of GDP

Answer 10

Household Consumption, Private Domestic Investment, Government Purchases, Net Exports

Question 11

Household Consumption (C)

Answer 11

• Non Durables: Bread, Milk, Clothes, Toys, etc.
• Durables: TV, Computers, Cars, Refrigerators, etc.
• Services: Dentist, Haircuts, Taxi, Lawyer, etc

Question 12

Private Domestic Investment (I)

Answer 12

• All purchases of machinery, equipment, and tools
• All construction
• Changes in business inventories

Question 13

Government Spendings (G)

Answer 13

• Spending by all levels of government
• All direct purchases of resources

Question 14

Net Exports (Xn)

Answer 14

• All spending on goods made in the country is included in GDP
• Exports - Imports

Question 15

GNI

Answer 15

Measure that includes the total value of consumption, investment, government spending, and net exports just like GDP, but also factors in the citizens of a country’s earning and income abroad and within the country’s borders.

Question 16

Formula for GNI

Answer 16

GNI = GDP + incomes flowing in from other countries + incomes flowing out to other countries

Question 17

Nominal GDP/GNI

Answer 17

• Nominal GDP or GNI is the total value of all goods and services produced (GDP) or income
  earned (GNI) in a country at current market prices, without adjusting for inflation.
• It reflects price changes over time, so it can be misleading if prices have increased or
  decreased.

Question 18

Real GDP/GNI

Answer 18

• Real GDP or GNI is the total value of all goods and services produced or income earned in a
  country, adjusted for inflation, using constant prices from a base year.
• It shows the actual growth in economic activity by removing the effects of price changes.

Question 19

Recession

Answer 19

Decline in total output, income, employment, and trade lasting six months or more. In recessions unemployment increases and there is a downward pressure on the price level

Question 19

The Business Cycle

Answer 19

Recession, Recovery, Expansion

Question 20

Recovery

Answer 20

When a recession has ended and national output begins to increase again

Question 21

Expansion

Answer 21

When an economy is growing at a rate beyond its long-run growth trend

Question 22

Causes of the Business Cycle

Answer 22

New Innovations, Changes in Productivity, Cyclical Fluctuations

Question 23

The Macroeconomic Objectives

Answer 23

Full Employment, Price level stability, Economic Growth, Improved equity in the distribution of income

Question 24

Full Employment

Answer 24

Most of the nations workers are able to find a job and that the nations resources are being put towards the production of goods and services

Question 25

Price level stability

Answer 25

Inflation will be low, meaning households' real income is high. Unstable prices lead to uncertainty and unstable livelihoods for the nations households

Question 26

Economic Growth

Answer 26

An increase in output and income overtime.

Question 27

Improved equity in the distribution of income

Answer 27

Free market tends to result in winners and losers. The government must look at the losers in the market system, and implement policies to improve the equity of the distribution of income so there is less poverty