3.1 Measuring Economic Activity

Question 1

Difference between real and nominal GDP?

Answer 1

Real GDP accounts for inflation, so the price of the products stay the same.

Question 2

How to calculate real GDP?

Answer 2

real GDP = nominal GDP / price deflator x 100

Question 3

If in 2001 the nominal GDP was 800m$ and the GDP deflator is 100, what is the real GDP?

Answer 3

(800 / 100) x 100 = 800m$
Doesn’t change (+0%)

Question 4

If in 2001 the nominal GDP was 800m$ and the GDP deflator is 119, what is the real GPD?

Answer 4

(800 / 119) x 100 = 672m$
As the nominal gdp (800) was deflated by 119 (19%)

Question 5

What is the GNI?

Answer 5

The total income generated by a country’s factors of production, regardless of where those FOPs are located. For example, it takes into account remittances made by domestic workers abroad, but does not take into account FDI spending.

GNI= GDP + (Income earned by domestic workers/firms – income earned by foreign workers/firms in the country).

Question 6

Definition of GDP?

Answer 6

“the market value of all finished goods and services produced within a country in a year”

Question 7

How to calculate GDP using the income method?

Answer 7

GDP = Add all the incomes together - Net taxes paid
Net taxes paid = all taxes paid - all subsidies

Question 8

How to calculate GDP using expenditure method?

Answer 8

GDP = C + I + G + (X-M) 
GDP = consumption + investment + government spending + (Exports - imports)

Question 9

Why would you use real GDP over nominal GDP?

Answer 9

Because nominal GDP does not account for the changes in inflation/ price level in calculating the value of economic activity. So, the nominal GDP may simply be increasing due to the increase in price levels, with not much of an increase in production of goods and services.

Question 10

If Canada has a higher GNI than GDP, what does that tell us?

Answer 10

That Canada has more money flowing inwards from citizens in countries abroad

Question 11

When is an economy going through a recession?

Answer 11

After a fall in real gdp for two quarters (2 x 3 months)

Question 12

What part of the business cycle is “A”?

Answer 12

A = Growth/ Expansion

Question 13

What part of the business cycle is “B”?

Answer 13

B = Boom

Question 14

What part of the business cycle is “C”?

Answer 14

C = Recession

Question 15

What part of the business cycle is “D”?

Answer 15

D = Trough

Question 16

What part of the business cycle is “E”?

Answer 16

E = Recovery

Question 17

In which countries is it difficult and inaccurate to measure GDP?

Answer 17

• Countries where a lot of informal economic activities take place (black market)
• Countries with high level of corruption
• Countries where not all citizens have been registered (Eg. China)

Question 18

Limitations of using GDP to measure economic growth

Answer 18

– Double counting: Due to the vast data collection, errors could occur in which a good is counted twice (especially capital goods as they are not finished products). This could lead to an inflated GDP.

– Informal activity: It is not ideal to use GDP to measure economic growth in countries with a lot of informal economic activity (such as black markets). This could mean that the GDP is actually lower than the value of all goods/services produced.

Question 19

Limitations of using GDP to measure living standards

Answer 19

– Does not take into account negative externalities.

– Does not take into account income inequalities.

Question 20

Limitations of using GDP per capita

Answer 20

– It does not take remittances into account, even though this is becoming more significant and it is increasing living standards.

– Firms operating in foreign countries will usually repatriate their profits back to their home countries. However, this is still included in GDP because the firms produce finished goods/services. (Doesn’t make people richer/distorts GDP).

Question 21

Benefits of using GNI

Answer 21

– Takes remittances into account

– Does not include profit repatriation

Question 22

What does the trend line in the business cycle represent

Answer 22

Continuous and sustained economic growth. It is sometimes called the potential growth line. Unlike the actual growth line, it is straight and does not decline.

Question 23

Output gaps (business cycle)

Answer 23

Positive output gap: When actual growth is greater than potential growth.

Negative output gap: When actual growth is less than potential growth.

Question 24

Boom (Business cycle)

Answer 24

– Growth is faster than the trend

– High profits/low unemployment

– High business/consumer confidence

– Imports increasing

– Government tax revenue increases

Question 25

Recession/Through (Business cycle)

Answer 25

– High unemployment

– Falling AD

– Falls in confidence/investments/consumer spending

– Falling prices/lower inflation

– Expansionary monetary/fiscal policy

Question 26

Recovery (Business cycle)

Answer 26

– Rising consumer/business confidence

– Higher investments

– Less unemployment

Question 27

Examples of demand shocks

Answer 27

– Sudden cuts in government spending

– Sudden housing market crash

– Sudden financial sector crash

Question 28

Example of supply shocks

Answer 28

– Wars

– Natural disasters

– Sudden increase in corporate taxes

Question 29

What are the leakages in the circular flow of income?

Answer 29

Saving, taxes, import spending

Question 30

What are injections in the circular flow of income?

Answer 30

Investment, government spending, export