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Definition of GDP

the market value of all final goods and services produced within a country in a given period of time


Y = C + I + G + NX What do the components stand for?

Y= GDP C= Consumption I= Investments G= Government NX= Net Exports


Expenditure vs income approach

-Expenditure approach adds up all the domestic expenditures made on final goods and services in a single year -Income approach dd up all the income earned by households and firms in a single year


Calculating nominal and real GDP as well as GDP deflator.

-Nominal involves a direct calculation of price x quantity

-Real uses a base year. Using the price from the base year you multiply each years quantity with the base year price.

-GDP deflator is nominal/real * 100


Shortcomings of GDP as a measure of social well being

Does not include the following key components

-Overall health of the citizens

-Education of the citizens

-Happiness of current lifestyle



Ideas correlated to higher real GDP per person

Countries with higher GDP tend to have 

-Higher life expectancy

-Higher education



Deifintion of CPI

a measure of the overall cost of the goods and services bought by a typical consumer


Shortcomings of CPI

-substitution bias: CPI ignores the possibility of consumers substituting goods as prices rise for another good.

- introduction of new goods: CPI does not include how as new goods are introduced, the value of the dolar increases as there are more options.

-unmeasured quality change: Changes in the quality of a good are not measured thoroughly.



Differences between CPI and GDP deflator.

-GDP deflator measures only domestically produced services and goods whereas CPI measures all goods and services bought by consumers.

-The basket of goods does not change frequently enough whereas the GDP accounts for new products annually.


Nominal vs Real variables

Nominal: Variables measured in monetary units.

Ex: The CD cost $10

Real: Variables measured in physical units

Ex: A year of college costs as much as a new Camry.



Define Economic Growth

An increase in the capacity of an economy to produce goods and services, compared from one period of time to another


Why is economic growth a desirable goal?

It is desirable goal for the prosperity of a nation as a whole. Future generations rely on the growth of an economy from on period to another. 


Factors of economic growth

-Natural resources within a nation. Leads to a lesser need for importing.

-Human capital: Education, skills, and value individuals bring to the economy.

-Investment in capital goods

-Role of entrepreneurship


Define Catch Up Effect

the property whereby countries that start off poor tend to grow more rapidly than countries that start off rich


Policies to encourage growth

- Fiscal policy to increase rate of AD

-Technology policy to increase innovation

-Providing incentives to start new businesses

-Monetary policy such as raising/lowering interest rates



Explain crowding out

As the government deficit increases they must borrow money which leads to less money being available for non government lenders. This leads to a crowding out of available loan money for individual borrowers.


As government deficit increases -> available loan amounts decrease and interest rates rise