7: GDP and Price Indexes

Question 1

GDP

Answer 1

the market value of all final goods and services produced within a country in a given period of time

Question 2

Components of GDP

Answer 2

GDP (Y): Y = C + I + G + X − M

where:
C = consumption expenditure; I = investment expenditure; G = government expenditure; X= exports; and M = imports.

Question 3

Investment

Answer 3

Investment refers to spending on new items of physical capital.

Question 4

Nominal GDP

Answer 4

the output of goods and services measured at current (variable) prices.

Question 5

Real GDP

Answer 5

the output of goods and services measured at constant prices  accounts for inflation (more accurate measure of change in volume)

Question 6

GDP Deflator FORMULA

Answer 6

Nominal GDP / Real GDP x 100

Question 7

GDP does not include… (4)

Answer 7

• Leisure
• Quality of environment
• Inequalities of income or wealth
• Volunteer work

Question 8

Why do we care about GDP?

Answer 8

• Having a larger GDP enables a country to afford better schools, better health care etc.
• Many indicators of the quality of life are positively correlated with GDP

Question 9

Inflation

Answer 9

Inflation is a persistent increase in the average level of prices for goods and services over time.

Question 10

What’s wrong with inflation?

Answer 10

• Inflation reduces the purchasing power of money
• It represents an increase in firm costs
• It creates uncertainty for firms and makes business planning more difficult especially when its volatile

Question 11

How do you measure GDP?

Answer 11

A Price Index

Question 12

CPI FORMULA

Answer 12

CPI = cost of basket (current year)/ cost of basket (base year) x 100

Question 13

Inflation Rate FORMULA

Answer 13

INFLATION RATE = Price (current year) – Price (previous year) / Price (previous year)