Lesson 1 Flashcards
(24 cards)
What is Gross Domestic Product (GDP)?
GDP is the total market value of all final goods and services produced within a country in a given period.
What are the three methods of calculating GDP?
- Product Method
- Income Method
- Expenditure Method
What is the formula for GDP in a closed economy?
Y = C + I + G
* Y = GDP
* C = Consumption
* I = Investment
* G = Government Spending.
What is the formula for GDP in an open economy?
Y = C + I + G + (X - M)
* X = Exports
* M = Imports
What is the difference between Nominal GDP and Real GDP?
Nominal GDP is measured at current prices, while Real GDP is adjusted for inflation using base-year prices.
How does inflation affect the difference between Nominal and Real GDP?
If prices increase, Nominal GDP rises but Real GDP remains stable if output doesn’t change.
What is the GDP deflator?
The GDP deflator is a price index that measures the level of prices for all new, domestically produced goods and services in an economy over a specific period. It is used to adjust Nominal GDP into Real GDP, accounting for inflation.
Why is GDP deflator useful?
- Unlike the Consumer Price Index (CPI), which tracks only consumer goods, the GDP deflator includes all goods and services produced domestically.
- It allows for flexible adjustments as the composition of GDP changes over time, whereas CPI uses a fixed basket of goods.
What is the formula for GDP deflator?
GDP Deflator= (Nominal GDP/Real GDP) x 100
What does the solution for GDP deflator indicate?
If the GDP deflator is greater than 100, it indicates that prices have risen compared to the base year, meaning inflation has occurred. If it is less than 100, it suggests deflation (a drop in price levels).
What is the difference between GDP and GNP?
GDP measures total income earned within a country, while GNP includes income earned by nationals abroad and excludes income earned by foreigners domestically.
When is GDP greater than GNP?
GDP (Gross Domestic Product) is greater than GNP (Gross National Product) when a country has a large foreign presence in its economy, meaning that a significant amount of income is generated within the country’s borders by foreign companies or foreign workers, but this income is not owned by the country’s citizens.
When does GDP > GNP?
1) A country has a large immigrant labor force.
- Foreign workers contribute to GDP by producing goods and services domestically.
- However, their earnings (wages) are sent back to their home countries, reducing GNP.
- Example: UAE has a high GDP due to its oil and service industries, but since many workers are foreign, their earnings leave the country, making GDP > GNP.
2) There are many foreign companies operating in the country.
- These companies generate revenue and profits within the country, contributing to GDP.
- However, if they send a significant portion of their profits back to their home country, this income is not included in GNP.
- Example: If an American company operates a factory in India, the income from that factory is counted in India’s GDP. But if the profits go back to the U.S., they are counted in U.S. GNP, not India’s.
When does GDP < GNP?
The reverse happens when a country’s nationals earn a significant amount of income outside their home country.
- A country has many citizens working abroad.
- There are large national investments in foreign businesses.
What are the main gains from trade?
Access to a greater variety of goods, improved efficiency, economic growth, and specialization benefits.
Who are a country’s main trading partners?
Trading partners are typically determined by factors such as geographic proximity, economic agreements, and comparative advantage.
What does the Gravity Model of trade state?
The Gravity Model predicts that trade between two countries depends on their economic sizes and the distance between them.
How does distance affect trade according to the Gravity Model?
Greater distance increases transportation costs, reducing trade volume.
What factors influence changes in trade patterns?
- Economic development
- Technological advancements
- Global agreements
- Shifts in production locations
What is meant by “composition of world trade”?
It refers to the types of goods and services traded globally, such as raw materials, manufactured goods, and services.
What are the different types of trade barriers?
Tariffs, quotas, subsidies, and non-tariff barriers like regulatory restrictions.
What role do international organizations like the WTO play in trade?
They help regulate global trade, resolve disputes, and promote free trade agreements.
How does international trade impact developing countries?
It can promote growth, create jobs, and increase access to technology, but may also expose industries to foreign competition.
Why do some countries impose protectionist policies?
To protect domestic industries, preserve jobs, and reduce reliance on foreign markets.
