CH 7 Measuring & Describing Aggregate Economy

Question 1

(free exercise: look up) Circular Flow Model

Answer 1

Circular Flow Model

Question 2

Circular Flow Model: 2 economic actors - __________ & __________

Answer 2

Households and Business

Question 3

Circular Flow Model: 2 markets - _______ market & ________ market

Answer 3

Produce & resource market

Question 4

Circular Flow Model: Goods and services move in one direction and _____ moves in the other direction

Answer 4

money

Question 5

_________ accounting - measure economy by measuring

1. Aggregate production
2. or aggregate expenditures
3. or aggregate income

Answer 5

Aggregate

Question 6

_____ ________ _______ (GDP)
-Measures aggregate production
-The total market value of all final goods and services produced within an economy in a time period

Answer 6

Gross domestic product

Question 7

______ _____ - not total number
-All quantities of goods and services produced are multiplied their market price per unit to determine a value measure of the good or service

Answer 7

Market Value

Question 8

Market Value - _____ times ________

Answer 8

price, quantity

Question 9

_____ ______, not intermediate goods
-goods and services purchased for final use

Answer 9

Final output

Question 10

____________ ________ - used as an input in the production of some other product

Answer 10

intermediate products

Question 11

Counting the sale of both final and intermediate goods would result in ______ counting

Answer 11

double

Question 12

Output produced domestically or within a nation’s borders, regardless of who owns it

Answer 12

GDP

Question 13

GNP

Answer 13

Gross National Product

Question 14

Output from the citizens and companies of a particular nation, no matter where they are located
EX - Nike, US company, makes sneakers in Indonesia

Answer 14

GNP

Question 15

-Total Market value of all final goods and services produced by the citizens of a country

Answer 15

GNP Definition

Question 16

GDP is divided into four expenditure categories or components by four different economic actors:
1. ___________ (C) is spending by households on goods and services
2. ___________ (I) is spending for the purpose of additional productions - by firms when expanding
3. ___________ _________ (G) is goods and services that governments buys
4. ___ _______ is spending on exports (X) minus spending on imports (M) by other countries

Answer 16

1. Consumption
2. Investments.
3. Government spending
4. Net exports

Question 17

Components of GDP: Consumption

Answer 17

Consumers or households

Question 18

Components of GDP: Investments

Answer 18

Firms

Question 19

Components of GDP: Government Spending

Answer 19

Government

Question 20

Components of GDP: Net Exports

Answer 20

Other Countries

Question 21

GDP Equation

Answer 21

GDP = C + I + G + (X - M)

Question 22

What is not counted as GDP?

Answer 22

*Secondhand sales
*Sales of stocks or bonds (not production or service
*Government transfer payments (Social Security)
*Household labor
*Illegal activities
*Cash or informal economy

Question 23

What is counted as GDP?

Answer 23

*Value added by a used car dealer
*Commissions paid to stockbrokers

Question 24

Limits of GDP Accounting Non-market Activity a. ____ ______

Answer 24

Illegal activity - Drug trade

Question 25

Limits of GDP Accounting Non-market Activity b. _________ _______ - paid in cash, don't pay taxes, not licensed

Answer 25

informal sector

Question 26

Limits of GDP Accounting Non-market Activity c. _________ ___________ - ranges from 25% - 50% of GDP

Answer 26

Household production

Question 27

Limits of GDP Accounting Non-market Activity d. ______ ____ - does it have value if you chose not to work so hard by working shorter hours, should we count this?

Answer 27

Leisure time

Question 28

Limits of GDP Accounting Other Issue 1. Failure to subtract ________ '____'

Answer 28

economic 'bads' Most common economic bad or social cost is pollution - which is a by-product of production

Question 29

Limits of GDP Accounting Other Issues 2. Failure to subtract ______ _____

Answer 29

social costs

Question 30

Limits of GDP Accounting Other Issues 3. _________ of _______ _______

Answer 30

Depletion of Natural Capital Doesn't take into account the depletion of finite natural resources

Question 31

Limits of GDP Accounting Other Issues 4. ___________ _______ -not taken into account

Answer 31

Qualitative changes GDP measures the value of the good - not the quality of the good

Question 32

Limits of GDP Accounting Other Issues 5. ______ ____________

Answer 32

Income Distribution GDP assumes that everyone makes the same income per year, but in most countries, there is a wide range of incomes Current GDP accounting methods does not calculate whether income inequalities are increasing or decreasing

Question 33

Limits of GDP Accounting Other Issues 6. _________ or ________ well being

Answer 33

Happiness or Economic Well Being GDP - measures economic market activity

Question 34

Other Measures -Instead of GDP...

Answer 34

Genuine Progress Indicator (GPI)

Question 35

-variety of adjustments to the progress of society rather than just economic activity * ___ includes goals such as pollution reduction, education, and health

Answer 35

GPI

Question 36

-GDP or output divided by the total population

Answer 36

Per Capita GDP

Question 37

-assumes that everyone makes the same income, but there may be a wide range of incomes

Answer 37

Limitations of Per Capita GDP

Question 38

-May be a misleading measure of living standards because of differences in non market activities and product prices

Answer 38

Limitations of Per Capita GDP

Question 39

_________ Income = Wages + Rents + Interest + Profits

Answer 39

Aggregate Income

Question 40

_________ Income or Gross Domestic Income - total income earned by citizens and businesses in a country in a year

Answer 40

Aggregate

Question 41

Income goes to factors of production Wages - _____ Rent - ____ Interest - _______ Profits - ________________

Answer 41

Labor Land Capital Entrepreneurship

Question 42

Aggregate Income = Aggregate ___________

Answer 42

Production

Question 43

Two ways to Calculate GDP

Answer 43

-Add up vales of final outputs or production (C, I, G, NX) -Add up values of earnings or income (W, R, I, P)

Question 44

Two ways that GDP can increase (1.)

Answer 44

An increase in the PRICES of goods and services

Question 45

Two ways that GDP can increase (2.)

Answer 45

An increase in the QUANTITY of goods and services

Question 46

How to determine what is affecting GDP

Answer 46

Use real GDP

Question 47

_______ GDP is the amount of goods and services measured at current prices

Answer 47

Nominal

Question 48

-the price in today's dollars

Answer 48

Nominal

Question 49

____ GDP is the total amount of goods and services produced, adjusted for inflation

Answer 49

Real

Question 50

-The price in a base year's dollars

Answer 50

Real

Question 51

Calculating Nominal GDP (Step 1.)

Answer 51

- use current prices and current quantities for each year

Question 52

Calculating Real GDP (Step 2.)

Answer 52

by using quantity in the current year and the price from the base year

Question 53

Tells us how much GDP has changed

Answer 53

Growth Rate

Question 54

=a percentage change in GDP = (change in GDP/ original or old GDP)

Answer 54

Growth rate

Question 55

-formula -Growth Rate or % change in GDP -GDP Growth Rate = (___ GDP - ___)/ ___ GDP

Answer 55

= (new GDP - old)/old GDP

Question 56

- Continual rise in the overall price level

Answer 56

Inflation

Question 57

-decrease in price level -Negative rate -Ex: -1% rate

Answer 57

Deflation

Question 58

Decrease in the rate of inflation -Inflation rate is lowered EX: Inflation rate

Answer 58

Disinflation

Question 59

-Measure Inflation with a _____ _____ -_____ _____ - measure of the composite prices of a specified group of goods

Answer 59

Price Index

Question 60

________ Price Index (CPI)

Answer 60

Consumer

Question 61

measures the prices of a fixed basket of goods, weighted according to each component's share of an average consumer's expenditures

Answer 61

Consumer Price Index (CPI)

Question 62

-problem - how do you compare the quality of goods over time - laptops, phones , cars, etc.

Question 63

price index that includes all goods and services in the economy

Answer 63

GDP Deflator

Question 64

-Measures goods & services purchased by consumers, firms, state & local governments and foreigners - Used to convert between nominal and real GDP - ___ ________ – may be either expressed as 1’s or 100’s

Answer 64

GDP Deflator

Question 65

-Real GDP = (Nominal GDP/GDP Deflator) x 100 -GDP Deflator = (Nominal GDP/ Real GDP ) x 100 (Only use 100 in formula if deflator in 100s)

Answer 65

GDP Deflator

Question 66

-________ _____ _____ (PPI) An index of prices that measures the average change in the selling prices received by domestic producers of goods and services over time -Producer's perspective -Can predict consumer inflation if producers' cost of inputs go up

Answer 66

Producer Price Index