1. GDP & Inflation

Question 1

GDP Definition

Answer 1

Market value of all final goods and services produced within a given time period.

Question 2

Components of GDP

Answer 2

Consumption, Investment, Government Purchases/Expenditure, Net Exports

Y = C + I + G + NX

Question 3

Consumption

Answer 3

Spending by households on goods and services, except new housing

Question 4

Investment

Answer 4

Purchase of goods that will be used in the future to produce other goods and services

Question 5

Government Purchases/Expenditure

Answer 5

Spending on goods and services by local and central governments

Question 6

Net Exports

Answer 6

Purchase of domestically produced goods by foreigners (exports) minus domestic purchase of foreign goods (imports)

Question 7

Gross National Product (GNP)/ Gross National Income (GNI)

Answer 7

Total income earned by a nation’s permanent residents.

Excludes income that foreign nationals earn in NZ but includes income that New Zealanders earn abroad

Question 8

Net Factor Income from Abroad (NFIA)

Answer 8

Difference between income earned by New Zealanders in foreign countries and that paid for foreigner for their contribution to GDP

Question 9

Gross National Disposable Income (GNDI)

Answer 9

Gross National Product (GNP) plus net current transfers from the rest of the world
Example: retired NZ resident receives income from UK pension (positive), NZ pays aid to the Solomon Islands (negative)

Question 10

What does Gross National Disposable Income (GNDI) provide the best measure for?

Answer 10

Income at a nation’s disposal for spending or savings

Question 11

Components of GNP

Answer 11

GNP = GDP + NFIA

Question 12

Components of GNDI

Answer 12

GNDI = GNP + net current transfers (NCT)

Question 13

Components of Net Foreign Income (NFI)

Answer 13

NFI = NFIA + NCT

Question 14

Nominal GDP

Answer 14

Uses current prices to value the economy’s production of goods and services in that year

Question 15

What do changes in nominal GDP reflect?

Answer 15

Both changes in quantities of goods and services and their prices

Question 16

Real GDP

Answer 16

Uses constant (base-year) prices to place a value on production of goods and services

Question 17

What do changes in real GDP reflect?

Answer 17

Only changes in the quantity of goods and services

Question 18

GDP Deflator Equation

Answer 18

(Nominal GDP/Real GDP) x 1000

Question 19

What does the GDP deflator reflect?

Answer 19

The portion of rise in nominal GDP caused by a rise in prices rather than a rise in quantity produced

Question 20

What is GDP is often used as?

Answer 20

Indicator of a country’s living standards and economic development.
Controversial as welfare depends on much more than what can be bought

Question 21

Inflation Rate

Answer 21

Percentage change in price level - measures how fast money is debased and loses its value

Question 22

Why may the CPI overstate the cost of living? (3 reasons)

Answer 22

1. Substitution Bias - consumers sub towards goods that are relatively inexpensive when prices change
2. New Goods - variety increase standard of living but new goods not included in basket right away
3. Quality - as quality of a good rises, it’s value rises even if the dollar price remains the same

Question 23

Consumer Price Index (CPI)

Answer 23

measures the changing price of a fixed basket of goods and services purchased by New Zealand households

Question 24

The Fisher Effect

Answer 24

Describes the relationship between nominal interest rate and the real interest rate

i = r + π

where
r = real interest rate
i -= nominal interest rate
π = inflaton