Circular flow diagram and GDP

Question 1

What does GDP stand for

Answer 1

Gross domestic product

Question 2

What is GDP

Answer 2

the dollar value of ALL FINAL goods and services produced in a country in one year

Question 3

What is GDP measured in

Answer 3

dollars

Question 4

What does GDP exclude

Answer 4

inputs only final products/services

Question 5

What are the 3 ways to measure GDP

Answer 5

1. expenditure approach (most important one)
2. income approach
3. value added approach

All of them will give the same answer

Question 6

Explain the expenditure appoarch

Answer 6

looks at all the purchases made on goods and services in a year

Question 7

What is included in the expenditure approach to calculating GDP

Answer 7

1. consumer spending (consumers)
2. Businesses - investment spending
3. Gov. - government spending
4. other countries - exports less imports = Net exports

Question 8

What is the formula using the expenditure approach to calculate GDP

Answer 8

GDP = C + I + G + (x-m)

Question 9

Explain the income Approach to calculate GDP

Answer 9

• all the income earned by all the purchases

everyone’s spending is someone’s income

Question 10

What is included in the income apporach

Answer 10

1. wages
2. rent
3. interest
4. profit

Question 11

What is the formula for the income approach

Answer 11

wages + rent + interest + profit

Question 12

What is the value added approach

Answer 12

adding up the value added at each stage of the production process

Question 13

ex. selling hats (only thing produced int he country)

Cost = $3 for year
sells for $10

how do you calculate this using the consumer spending approach

Answer 13

consumer spending is $10
GDP = $10 (value of final good)

Question 14

ex. selling hats (only thing produced int he country)

Cost = $3 for year
sells for $10

how do you calculate this using the income approach GDP

Answer 14

$7 profit toward national income
$3 profit buy the guy who sold you the yarn
—–
$10 GDP

Question 15

ex. selling hats (only thing produced int he country)

Cost = $3 for year
sells for $10

how do you calculate this using the value added approach

Answer 15

person who converted the raw cotton into yarn added $3 of value to it when he sold it for $3

Person who converted into a hat and sold it for $10 he put $7 value added into it

$3 plus $7 = $10 GDP

Question 16

What are the things that don’t count in GDP

Answer 16

1. intermediate goods
2. used goods
3. financial transactions
4. Gov transfer payments

Question 17

Explain why intermediate goods don’t count in GDP

Answer 17

used to produce final good

Question 18

Explain why used goods don’t count in GDP

Answer 18

things were produced in pervious years

Question 19

Explain why financial transactions don’t count in GDP

Answer 19

nothing new is produced (stocks or bonds)

Question 20

Explain why gov transfer payments don’t count in GDP

Answer 20

add

Question 21

What is the product market (in circular flow diagram) include

Answer 21

Businesses and households

Question 22

Explain the product market

Answer 22

businesses sell goods and services to households in the Product market

Question 23

Where is a product market

Answer 23

anywhere you can buy stuff

Question 24

What is the Resource Market (in circular flow diagram) include

Answer 24

Businesess and households

Question 25

What is the Resource Market

Answer 25

businesses need resources like workers and machines

Question 26

What are the 4 categories of resources

Answer 26

1. land - natural resources 2. labour 3. capital - tools and machines 4. entrepreneurship

Question 27

If you sell land you

Answer 27

earn rent

Question 28

if you sell labour you

Answer 28

earn wages

Question 29

For capital you get

Answer 29

gets interest

Question 30

Entrepreneurship you get

Answer 30

profit

Question 31

is your local mall a product market or a resource market

Answer 31

Both: Product market - buy things, profit Resource market - working, earning wages

Question 32

do businesses demand or supply

Answer 32

BOTH Demand - in resource market Supply - in product market

Question 33

Explain the government's role in the circular flow diagram

Answer 33

buys goods and services form businesses in the product market (ie fire trucks ) they pay for them (gov. spending) They also buy resources form resource market like teachers and firefighters

Question 34

What are transfer payments

Answer 34

public goods to households and businesses Subsidies: to businesses welfare to households

Question 35

Explain taxes in the circular flow diagram

Answer 35

this is how the gov. receives their money from businesses and households

Question 36

Which approaches to calculating GDP are seen on the circular flow diagram

Answer 36

income approach and the expenditure approach

Question 37

Financial sector of the circular flow diagram: explain private savings

Answer 37

savings by individual households

Question 38

Financial sector of the circular flow diagram: explain public savings

Answer 38

savings by the gov. how its lent to businesses and individuals in th gov. to make purchases

Question 39

No $ (great depression)

Answer 39

no savings no lending no spending = economy will shrivel up

Question 40

Wha tis the closed economy include

Answer 40

Consumer spending business spending or investment Gov. spending C I G

Question 41

Every economy has 3 economic goals , what are they

Answer 41

1. Economic Growth 2. Limit unemployment 3. keep prices stable

Question 42

What is the most important measurement

Answer 42

GDP

Question 43

What are the limits of GDP

Answer 43

Its not the best way to measure standard of living

Question 44

Why is GDP not the best way to measure the standard of living

Answer 44

its hard to gauge a family's standard of living by calculating the # of pies they can produce depends on how many people are in the the family, the size of each lice and the quality and taste of the pie

Question 45

What are the limitations:

Answer 45

PIES P - population I - Inequality E - environment S - Shadow economy

Question 46

Explain Population as it relates to the limits of GDP and what is the fix

Answer 46

some countries are bigger and have to disperse the GDP over more people Fix: calculate GDP per capita

Question 47

Explain Inequality as it relates to the limits of GDP and what is the fix

Answer 47

all households in the country do not have the same standard of living Depends on how income is distributed

Question 48

Explain Environment as it relates to the limits of GDP and what is the fix

Answer 48

no way to calculate the benefits of clean air, clean water or pollution form production (subjective, hard to value)

Question 49

Explain Shadow Economy as it relates to the limits of GDP and what is the fix

Answer 49

you buy a pie from a store, that counts toward GDP If you buy it from a friend, it does not count toward GDP Doesn't include volunteer work or household production or illegal transactions

Question 50

How do we deal with GDP limitations

Answer 50

1. some suggested using different ways to calcualte such as the happiness index or the GPI (genune progress indicator) - this can still be subjective and hard to calculate