Chapter 4

Question 1

5 Components of GDP

Answer 1

ALL
At Market Value (market prices)
Final goods and services
In a given country
In a given time period

Question 2

4 players in the economy

Answer 2

Households
Firms
Government
Rest of the World

Question 3

Household contributions to economy

Answer 3

Consumption expenditure (C)
Savings Expenditure (S)

Question 4

Firms contributions to economy

Answer 4

Investment (I)

Question 5

Government Expenditure contributions to economy

Answer 5

Government Spending (G)
Transfer Payments (TR)
Total Tax Revenue (T)

Question 6

Rest of World Contributions to economy

Answer 6

Exports (X)
Imports (M)
Net Exports (NX)

Question 7

Depreciation

Answer 7

decrease in value of firm’s capital

Question 8

Gross Investment

Answer 8

total amount spend buying new capital and replacing depreciated capital

Question 9

Net investment

Answer 9

amount that value of capital increases

Question 10

Expenditure approach of measuring GDP

Answer 10

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

Question 11

Income approach of measuring GDP

Answer 11

measures GDP by factors of production they hire (rent, wages, interest, and profit)

Question 12

Net Domestic Income at Factor costs

Answer 12

NDIfc= w + other factors
w= wages, salaries, supplemental income
other factors are profits, interest, etc.

Question 13

Gross domestic income at factor costs

Answer 13

NDIfc + depreciation

Question 14

GDP = (regarding income approach)

Answer 14

GDP = (NDIfc + Depreciation + Indirect Taxes less subsidies)

Question 15

Nominal GDP

Answer 15

value of final goods/services when valued at prices of that year

Question 16

Real GDP

Answer 16

value of final goods/services when valued at prices of a base year

Question 17

2 main uses of GDP

Answer 17

comparing standard of living over time
comparing standard of living across countries

Question 18

Potential GDP (Yp)

Answer 18

max quantity of Real GDP produced while avoiding shortages that would make inflation. Full employment at Yp. Doesn’t grow at a constant rate

Question 19

Lucas Wedge

Answer 19

$ value of gap between Real GDP/person and what Real GDP/person would have been if the 1960’s growth rate persisted

Question 20

Two Phases of the Business cycle

Answer 20

expansion- GDP increase
recession- GDP decrease for at least 2 quarters

Question 21

Two Turning Points of the Business cycle

Answer 21

Peak- end of expansion
Trough- end of recession

Question 22

2 problems with comparing living standards across countries

Answer 22

different currencies
different prices

Question 23

5 limitations of GDP, over or underestimate, and examples

Answer 23

Household production (cooking)- U
Underground economic activity (drugs)- U
Leisure time -U
Volunteers (coaches) -U
Environmental quality (pollution) -O