2 Measuring the Macroeconomy

Question 1

Define GDP

Answer 1

Gross domestic product is the market value of the final goods and services produced in an economy over a certain period.

Question 2

What are the different approaches of measuring GDP?

Answer 2

Production - the value of all the output produced

Expenditure - the value of all the output consumed

Income - the value of all the income earned

Production = expenditure = income

Question 3

Equation for GDP.

What approach does it use?

Answer 3

Where, Y = GDP (in dollars), C = consumption, I = investment, G = government purchases and NX = net exports (exports - imports)

It uses the expenditure approach

Question 4

Define capital

Answer 4

The inputs into production other than labour that are not completely used up in the production process.

Question 5

What is common observation in economies over the last 70 years (capital and labour)?

Answer 5

Economies becoming more capital-intensive. Labour’s share of GDP gradually declining to about two thirds of GDP.

Question 6

Why, when using a production approach to GDP, do we not double count?

Answer 6

Only the final sale of goods and services counts to GDP.

Each producer creates an amount of GDP equal to the amount of value that is added during production - this is called value added.

Question 7

What equation relates nominal and real GDP?

Answer 7

Nominal GDP = Price Level × real GDP

Question 8

Define Laspeyres index

Answer 8

Method of computing the change in real GDP using the initial prices.

Question 9

Define Paasche index

Answer 9

Method of computing the change in real GDP using final prices.

Question 10

Define Fisher index

Answer 10

Also called chain weighting

Method of computing the change in real GDP by taking averages of the Laspeyres and Paasche indices.

Question 11

What is the GDP deflator?

Answer 11

The price level that satisfies the equation:

Nominal GDP = Price Level × real GDP

Question 12

How can we calculate the percentage change in nominal GDP using percentage changes in price level and GDP?

Answer 12

Percentage change in nominal GDP ≈ percentage change in price level + percentage change in real GDP

Question 13

Define exchange rate

Answer 13

The price at which one currency can be traded (exchanged) for another.

Question 14

How can you calculate another country’s GDP in the domestic currency?

Answer 14

Question 15

Equation for another country’s real GDP in terms price levels and nominal GDP

Answer 15

Question 16

What is the equation for economic profit?

Answer 16

Question 17

What is the equation for accounting profit?

Answer 17

Question 18

Calculate GDP using the output approach

Answer 18

Output method: 10*(400-200)+10*(200-1000)+1000 = 4000

Question 19

Calculate GDP using the expenditure approach

Answer 19

Expenditure method: 10*400 = 4000

Question 20

Calculate GDP using the income approach

Answer 20

Income method: 2800 + 1200 = 4000

Question 21

Calculate US GDP using the output approach

Answer 21

Output method: 10*(400-200) = 2000

Question 22

Calculate US GDP using the expenditure approach

Answer 22

Expenditure method: 10*400 - 10*200 = 2000

Question 23

Calculate US GDP using the income approach

Answer 23

Income method: 1200 + 800 = 2000

Question 24

Issues with GDP

Answer 24

• Not all market activity is recorded in official statistics
• Market prices may not reflect social values so may not be a measure of welfare
• GDP is gross - no allowance for depreciation, nor sustainability
• GDP may not relate to consumption - which is closer to measuring welfare
• No allowance for inequality
• Second hand goods are not included - change of ownership but not production
• Capital gains on houses not included
• Inventories count as a firm buying its own production
• Despite most govt. services are not sold, they are included using price measures by cost (e.g. public education = sum of teacher salaries, operating expenses and equipment).

Question 25

GDP vs GNI

[definitions]

Answer 25

GDP: denotes value of output of goods and services produced within a country (including nationals and resident foreigners). Measures value added in the country.

GNI: denotes value of output of goods and services produced by the nationals of a country (excl. foreign residents remittances, but incl. remittances from nationals abroad). Measures income of country’s citizens.

Question 26

How to get from UK GDP to UK GNI

Answer 26

Add:

• remitted profits from UK firms operating abroad
• interest payments and dividends received from overseas investments
• remittances from UK residents based overseas
• grants received from foreign governments

Deduct:

• remitted profits from foreign firms operating in the UK
• interest payments and dividends received from foreign investments in the UK
• remittances from overseas residents based in the UK
• grants paid by UK government

Question 27

What is the Easterlin Paradox?

Answer 27

As GDP per capita goes up, % those that say they are very happy stagnates or even declines.