1st Midterm

Question 1

What is Net Domestic Product (NDP)?

Answer 1

Value added of all domestically made products minus the depreciation on capital

Question 2

What is the GDP deflator equation?

Answer 2

(GDP of current year/Base year prices)*100

Question 3

What are the reasons that NDP are not used as often despite being generally better measures of actual value created/destroyed?

Answer 3

1. Methods of calculating consumption of fixed capital are complex and differ between countries which causes different final numbers for different methods
2. Differences between GDP and NDP are small enough that the conclusions do not change

Question 4

What is GDP?

Answer 4

The value of goods and services produced in the domestic economy over a given amount of time

Question 5

What are consumer goods and services?

Answer 5

Output that is destroyed for the purpose of augmenting current material living standards

Question 6

What are investment goods and services?

Answer 6

A factor of production - investment augments future capital therefore investment expands future production

Question 7

What is the expenditure approach to calculating GDP?

Answer 7

Total spending on all domestically produced goods and services. All production is sold therefore the value of production is the value of all expenditures (unsold goods count as inventory and therefore investment) also some goods do not get sold on the open market and therefore are imputed ie shelter services from owning own home

Question 8

What is an equation for the expenditure method?

Answer 8

The sum of the price times each good sold

Question 9

How do you split Gross domestic expenditures into classes and sectors?

Answer 9

Traditionally sectors are split into 1 Household, 2. Business, 3. Government, 4. Foreign and product classes are split into investment and Consumption

Question 10

What is the way to calculate GDE?

Answer 10

GDE = (C + I + G + X) - M

Question 11

What is the income approach to calculating GDP?

Answer 11

The idea that every expenditure constitutes income to someone else. Therefore the value of production is the income that is derived from the production and sale of products (does not include transfers or taxes)

Question 12

What is the income expenditure method of calculating GDP?

Answer 12

Y = C + I + G + NX where NX is net exports (X-M)

Just an accounting method and does not describe any causal relationship between the measured variables

Question 13

What is nominal GDP?

Answer 13

GDP measured at current prices

Question 14

What is real GDP?

Answer 14

GDP measured in base year prices

Question 15

What are the problems with using GDP as a measure?

Answer 15

1. GDP is updates as more data comes in, can be revised multiple times and the most accurate measure may not come out for up to 5 years
2. Does not account for goods and services produced in the home
3. May be incomplete in lesser developed nations where they have less formal markets and may not have comprehensive data coverage
4. Does not measure the value of illegal goods and services
5. Does not record people who work “under the table”
6. Capital consumption is not calculated as an expense in production
7. Does not describe how output is allocated

Question 16

How to determine if a good or service is consumption or investment?

Answer 16

If the product or service lasts longer than a given interval of time. The most common intervals of time in Macroeconomic analysis is 3 months ( a quarter)