Measuring a nation's income

Question 1

What are 4 ways to measure an economy’s output?

Answer 1

Circular flow of income
Gross Domestic Product (GDP)
Real vs Nominal production
GDP and well being

Question 2

What are 4 ways of measuring the cost of living?

Answer 2

Consumer Price Index (CPI)
Measuring inflation
Correcting for inflation
Real vs Nominal interest rates

Question 3

Why must income equal expenditure for an economy as a whole?

Answer 3

Every transaction has a buyer and a seller

Every $ of spending by some buyer is a $ of income for some seller

Question 4

What would cause a large impact on the economy?

Answer 4

If people decided to reduce their spending

Question 5

What does a circular flow diagram represent?

Answer 5

How money, services and goods move through the economy.

Question 6

What is GDP a measurement of?

Answer 6

It is the measurement of the income and expenditures of an economy

Question 7

What is GDP?

Answer 7

The total market value of all goods and services produced within a country in a given period of time

Question 8

For what goods does the GDP record value?

Answer 8

GDP records the value of finished goods only, not intermediate goods, this is because the value is only counted once

Question 9

For what type of area or region is GDP measured?

Answer 9

GDP is measured for countries

Question 10

What can the time period for measuring GDP be?

Answer 10

A quarter or a year

Question 11

What does the market decide?

Answer 11

How much people are willing to pay

Question 12

What type of goods don’t reach the consumer?

Answer 12

Intermediate goods

Question 13

What does GDP include?

Answer 13

All items produced in the economy and sold legally in markets

Question 14

What does GDP exclude?

Answer 14

Most items that are produced and consumed at home or that never enter the market place.
It excluded goods that are produced and sold illicitly such as illegal drugs

Question 15

Why can GDP vary?

Answer 15

Because it concerns legal sales

Question 16

What is the GDP equation?

Answer 16

Y = C + I + G + NX

Question 17

What is Y in the GDP equation?

Answer 17

Y is GDP

Question 18

What is C in the GDP equation?

Answer 18

C is consumption

Question 19

What is I in the GDP equation?

Answer 19

I is investment

Question 20

What is G in the GDP equation?

Answer 20

Government purchases

Question 21

What is NX in the GDP equation?

Answer 21

NX is net exports

Question 22

What is consumption?

Answer 22

This is spending by households on goods and services, with the exception of purchasing new housing.
It suggests something that is used immediately.

Question 23

What is investment?

Answer 23

The spending on capital equipment, inventories and structures, including new housing

Question 24

What is investment used for?

Answer 24

The future

Question 25

What is consumption used for?

Answer 25

It is used immediately

Question 26

What is meant by government purchases?

Answer 26

The spending on goods and services by local and central governments

Question 27

What do government purchases not include?

Answer 27

Transfer payments

Question 28

Why do government purchases not include transfer payments?

Answer 28

Because they are not made in exchange for currently produced goods or services

Question 29

What are transfer payments?

Answer 29

Things like benefits and pensions

Question 30

What are net exports?

Answer 30

Exports minus imports

Question 31

Who finances unemployment benefits?

Answer 31

People paying income tax

Question 32

What does nominal GDP value?

Answer 32

Nominal GDP values the production of goods and services at current prices

Question 33

What does real GDP value?

Answer 33

Real GDP values the production of goods and services at constant prices

Question 34

Why does nominal GDP have to be adjusted?

Answer 34

In order to give an accurate view of the economy

Question 35

How can nominal GDP be adjusted?

Answer 35

By using a GDP deflator

Question 36

What is a GDP deflator?

Answer 36

A measure of the price level calculated as the ratio of nominal GDP to real GDP x 100

Question 37

What is the real GDP equation?

Answer 37

Real GDP = nominal GDP / GDP deflator

Question 38

What is the GDP deflator equation?

Answer 38

GDP deflator = (nominal GDP / real GDP) x 100

Question 39

What information does the GDP deflator provide?

Answer 39

It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in quantities produced

Question 40

What does the GDP deflator remove distortion from?

Answer 40

It removes distortion from inflation

Question 41

What 3 things that contribute to well-being are not included in GDP?

Answer 41

The value of leisure The value of a clean environment The value of most activities that take place outside of markets

Question 42

Give an example of two activities that take place outside of markets that aren't included in GDP

Answer 42

The value of the time parents spend with their children | The value of volunteer work

Question 43

What is GDP the best single measure of?

Answer 43

GDP is the best single measure of the economic well-being of a society

Question 44

What information does GDP per person provide?

Answer 44

It gives the mean income and expenditure of people in the economy

Question 45

What does a high GDP indicate?

Answer 45

A high GDP indicates a higher standard of living

Question 46

Explain the UK's GDP from 2009

Answer 46

% of consumption is increasing but investment is decreasing Imports are more than exports- worries with trade The UK has had a negative net export value for a very long time

Question 47

What is CPI a measure of?

Answer 47

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

Question 48

How often does the Office of National Statistics report the CPI?

Answer 48

Each month

Question 49

What is CPI used to monitor?

Answer 49

It is used to monitor changes in the cost of living over time

Question 50

What does the typical family have to do when CPI rises?

Answer 50

The typical family has to spend more money to maintain the same standard of living

Question 51

What does inflation describe?

Answer 51

It describes a situation in which the economy's overall price level is rising

Question 52

What is the inflation rate?

Answer 52

It is the percentage change in the price index from the previous period

Question 53

What is required when calculating CPI?

Answer 53

A base year

Question 54

What does a CPI base year do?

Answer 54

Act as a bench mark against which other years are compared

Question 55

How can you compute the CPI?

Answer 55

Divide the price of the basket in one year by the price in the base year and multiply by 100

Question 56

What is the basket used to calculate CPI?

Answer 56

It is the cost of living from a representative person

Question 57

What is an issue with the CPI basket?

Answer 57

Not all people consume the same things, for example not everyone smokes

Question 58

How do you calculate the inflation rate?

Answer 58

((CPI in Year 2- CPI in Year 1)/ CPI in Year 1 ) x 100

Question 59

What does lower inflation not imply?

Answer 59

Lower inflation does not imply that prices are lower

Question 60

What does lower inflation imply?

Answer 60

It implies that the rate of price increase is lower

Question 61

What are the GDP deflator and CPI used to gauge?

Answer 61

How quickly prices are rising

Question 62

What two differences can cause the GDP deflator and CPI to diverge?

Answer 62

The GDP deflator reflects the prices of all goods and services produced domestically The CPI reflects the prices of all goods and services bought by consumers

Question 63

What are used to correct for the effects inflation when comparing money figures from different times?

Answer 63

Price indexes

Question 64

Give an example of something that is indexed for inflation

Answer 64

Pensions

Question 65

What is meant by "indexed for inflation"?

Answer 65

A money amount has automatically been corrected for inflation by law or contract

Question 66

What does interest represent?

Answer 66

Interest represents a payment in the future for a transfer of money in the past

Question 67

Which type of interest rate is usually imported?

Answer 67

The nominal interest rate is usually reported

Question 68

What is the nominal interest rate not corrected for when it is reported?

Answer 68

It is not corrected for inflation

Question 69

Which interest rate does the bank pay?

Answer 69

It pays the nominal interest rate

Question 70

What is the real interest rate a version of?

Answer 70

It is the nominal interest rate that is corrected for the effects of inflation

Question 71

How can you find the real interest rate if you have the nominal interest rate and the inflation?

Answer 71

nominal interest rate - inflation

Question 72

When is the best time to borrow?

Answer 72

When inflation is high

Question 73

Why is it a good idea to borrow when inflation is high?

Answer 73

If the interest rate is frozen but inflation is high then the loan will be easier to pay back as you will earn more for the same amount of effort. When inflation is higher than interest rates, it will reduce the value of money.