3. Economic growth

Question 1

What is GDP?

Answer 1

AKA Gross Domestic Product, it is the market value of all final goods and services produced within the country in a given period of time.

Question 2

In the definition of GDP, what does “market value” mean?

Answer 2

to measure the total production by valuing items at market value (PxQ)

Question 3

In the definition of GDP, what does “all goods and services produced” mean?

Answer 3

includes all final goods and services produced for the ultimate, final user, sold legally in the markets. (Not including intermediate goods which are resources used as inputs for the production of final products, and not including transfer payments and purely financial transactions which do not produce any goods or services)

Question 4

In the definition of GDP, what does “within a country” mean?

Answer 4

Only goods and services produced within the country counts as part of that country’s GDP

Question 5

In the definition of GDP, what does “in a given period of time” mean?

Answer 5

measures the value of production for the given time frame only

Question 6

The concepts in the circular flow model are used to calculate GDP. What is the name of this method of calculating the GDP?

Answer 6

Expenditure approach.

Question 7

Define expenditure approach

Answer 7

it measures GDP by adding all the spending on domestically produced final products during a specific period of time.

Question 8

What is the total spending by each sector called?

Answer 8

Households: C (consumption)
Firms: I (investment)
Government: G (government spending)
Foreign sector: X-M (net exports)

Question 9

What is the formula for expenditure approach?

Answer 9

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

Question 10

What is consumption spending?

Answer 10

spending by households including expenditure on both tangible and intangible items

Question 11

What is investment spending?

Answer 11

spending that increases the capital stock of the economy. Includes firms spending on new equipment, increases to inventory due to unsold output for that time period, and households spending on new homes.

Question 12

What is government spending?

Answer 12

spending by all levels of the government including government consumption spending as well as government investment spending. excludes transfer payments as they do not represent currently produced output.

Question 13

What is net exports?

Answer 13

spending on domestically produced goods by foreigners (exports) minus purchases of foreign goods by domestic residents (imports)

Question 14

What is economic growth?

Answer 14

The increases in national output, measured by the percentage change in real GDP over time. (also through a percentage change in real GDP per capita, over time)

Question 15

Which economic model can show economic growth?

Answer 15

An increase in growth can be shown by an outward/ rightward shift of the PPF curve

Question 16

𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 formula?

Answer 16

(𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑟𝑒𝑎𝑙 𝐺𝑃𝐷 ) / (𝑟𝑒𝑎𝑙 𝐺𝑃𝐷 of 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑝𝑒𝑟𝑖𝑜𝑑) ×100

Question 17

𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 formula?

Answer 17

(𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 )/(𝑝𝑜𝑝𝑢𝑙𝑎𝑡𝑖𝑜𝑛 )

Question 18

𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 𝑔𝑟𝑜𝑤𝑡ℎ 𝑟𝑎𝑡𝑒 formula?

Answer 18

(𝑐ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎) / (𝑟𝑒𝑎𝑙 𝐺𝐷𝑃 𝑝𝑒𝑟 𝑐𝑎𝑝𝑖𝑡𝑎 of 𝑝𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑝𝑒𝑟𝑖𝑜𝑑) ×100

Question 19

What is The difference between real GDP & nominal GDP?

Answer 19

Nominal GDP is the total value of all final goods and services produced within the economy over a given period of time, measured in today’s prices and not adjusted for inflation. Whereas, Real GDP is the total value of all final goods and services produced within the economy over a given period of time, adjusted for inflation using market priced in a specific year in the past.

Question 20

Why does a change in nominal GDP not necessarily mean an equal change in quantity of all final goods and services produced?

Answer 20

because some or ALL of the change in GDP could have been caused simply by a change in P level while production may not have changed as much (or not changed AT ALL)

Question 21

What are the two factors of economic growth?

Answer 21

Demand-side sources and Supply-side sources

Question 22

How does demand-side sources affect economic growth ?

Answer 22

due to changes in Aggregate demand, where and increase in AD encourages firms to producwe more and the increase in production can lead to economic growth. AD can increase if there are increases in consumption demand, investment demand, government demand and/or net export demand.

Question 23

How does supply side sources affect economic growth?

Answer 23

due to changes in aggregate supply, where if aggregate supply increases, it means more output is being produced and this leads to economic growth. AS changes if there is any changes to cost of production.

Question 24

Strengths of GDP per capita as a measure of economic prosperity?

Answer 24

• measures access to goods and services necessary to enjoy life
  *it is comparable across different years as it is measured in terms of monetary value (adjusted for inflation)

Question 25

Weaknesses of GDP per capita as a measure of economic prosperity?

Answer 25

*excludes the effect on the environment
*does not take into account leisure time
* changes in quality of products are not reflected
* does not indicate how the income is distributed
*excludes all output that is not traded within the market.

Question 26

What is economic prosperity?

Answer 26

maintaining a high living standard over the long term in a sustainable manner

Question 27

Why does changes to real GDP not necessarily mean economic prosperity has changed?

Answer 27

because it only looks at monetary factor

Question 28

What is another measure of economic prosperity?

Answer 28

HDI, the Human Development Index.

Question 29

What is HDI and what can it do?

Answer 29

It is an index measuring life expectancy, education and per capita income indicators which are used to rank countries in terms of human development.
HDI can indicate if people can enjoy and sustain a higher standard of living over the long term.

Question 30

What is the first reason why HDI may be a better indicator for economic prosperity than real GDP?

Answer 30

HDI considers education while real GDP does not. Education ensures that a country and its people can continue to develop skills, which can lead to better quality of goods and services. Moreover, higher education means better paying jobs which can allow the people of a country to enjoy a higher standard of living.

Question 31

What is the second reason HDI may be a better indicator of economic prosperity than real GDP?

Answer 31

HDI considers life expectancy while real GDP does not. If a country’s people are experiencing a long life, it can be inferred that they have access to better healthcare, with which they can enjoy a higher standard of living. With long life expectancy, we can also infer that the people of that nation are more likely enjoying a higher quality of life in terms of living with less pollution.