GDP

Question 1

What does GDP measure?

Answer 1

• Total income of everyone in the economy
  Total expenditure on the econoWmy’s output of goods and services

Question 2

What does income equal

Answer 2

Expenditure

Question 3

What does the circular flow diagram depict?

Answer 3

Macroeconomy
illustrates GDP as spending
shows revenue and factor payments
shows income

Question 4

What do households do in the circular economy?

Answer 4

• Own factors of production, sell or rent them to firms for income
  Buy and consume goods and services

Question 5

What do firms do in circular economy?

Answer 5

Buy or hire factors of production (land, labor, capital, entrepreneurship)
Use them to produce goods and services
Sell goods and services

Question 6

What does the circular economy diagram omit?

Answer 6

The gov: collects taxes, buys goods and services

The financial system: matches saver’s supply of funds with borrower’s demand for loans

The foreign sector: trades goods and services, financial assets and currencies with the country’s residents

Question 7

What is GDP?

Answer 7

Market value of all FINAL goods and services produced within a country in a given period.

Question 8

What is excluded from GDP?

Answer 8

Things that don’t have a market value e.g. your homework, or things you do for yourself

Intermediate goods

Used goods

Financial transactions

Transfer payments

Most items produced and consumed at home
Most items produced and sold illicitly

Question 9

What does GDP include

Answer 9

ALL items produced in the economy and sold legally in markets

Question 10

What are final goods?

Answer 10

Goods intended for the END USER

Question 11

What are intermediate goods?

Answer 11

Goods used as components or ingredients in the production of other goods

Question 12

What are the four components of GDP

Answer 12

Consumption (C)
Investment (I)
Government Purchases (G)
Net Exports (NX)

Question 13

What is the equation for GDP?

Answer 13

Y = C+I+G+NX

Question 14

What does consumption include?

Answer 14

Includes: spending on households on goods and services
Excludes: purchases of new housing

Question 15

What does investment include

Answer 15

Includes: spending on goods that will be used in the future to produce more goods
-Business capital
-Residential capital
-Inventory accumulations

Inventory: e.g. if Apple produces a computer and adds it to its inventory instead of selling it

Question 16

What does government purchases include and exclude

Answer 16

Includes: spending on goods and services purchased by gov at fed, state and local levels

Excludes: transfer payments e.g. social security, unemployment insurance benefits

Question 17

What are net exports

Answer 17

Exports - imports

Exports: foreign spending on the economy’s goods and services

Imports: portions of C,I and G spent on goods and services produced abroad

Question 18

What is nominal GDP?

Answer 18

Production of goods and services valued at current prices, not corrected for inflation

Question 19

What is real GDP?

Answer 19

Production of goods and services valued at constant prices, corrected for inflation.
This uses base-year prices to value the economy’s production

Question 20

How to calculate nominal GDP

Answer 20

price x quantity

Question 21

How to calculate real GDP

Answer 21

Use the base year PRICES and use that when computing the GDP for the other years

Question 22

What is the GDP deflator?

Answer 22

Measures current level of prices relative to the level of prices in the base year

Can be used to take inflation out of nominal GDP (deflate it)

Question 23

GDP deflator equation

Answer 23

GDP deflator =
(NOMINAL GDP)/(REAL GDP) *100

Question 24

What is inflation?

Answer 24

When too much money is being printed and economy’s overall price level is rising

Question 25

How to calculate inflation rate: hint: use GDP deflator

Answer 25

Inflation rate in y2 = (GDP deflator y2 - GDP deflator y1)/ (GDP deflator y1) *100

Question 26

Why is GDP not a good measure of economic well-being

Answer 26

Does not measure: - leisure - value of almost all activity that takes place outside markets (e.g. volunteer work) - quality of the environment - distribution of income

Question 27

Why do we care about GDP?

Answer 27

Enables a country to afford better resources e.g. better schools, cleaner environment, health care etc. Quality of life is correlated with GDP e.g. schooling life satisfaction

Question 28

What is GDI?

Answer 28

Gross domestic income: the difference between that and GDP is statical discrepancy Shows total income in economy

Question 29

What is GNP?

Answer 29

Total income earned by a nation's permanent residents. Includes income domestic residents earn abroad. excludes foreigners money

Question 30

What is NNP?

Answer 30

Total income of a nation's residents (GNP) minus losses from depreciation

Question 31

What is personal income?

Answer 31

Income that households and norcoprorate businesses receive. Excludes retained earnings (income corporations own but do not pay out to their owners) Subtracts in direct business taxes Includes interest receive from holdings of gov debt and income that households receive from gov transfer programs

Question 32

What is disposable personal income

Answer 32

Income that households/non corporate businesses have left after satisfying all their obligations to gov (personal income minus personal taxes and certain non tax payments)

Question 33

What is national income?

Answer 33

Total income earned by a nation's residents in the production of goods and services