Ch. 9 - GDP

Question 1

What is Positive Analysis? What is Normative Analysis?

Answer 1

Positive Analysis - Describes what IS happening, explaining why or predicting what will happen

Normative Analysis - Prescribes what SHOULD happen, which involves value judgement

Question 2

What are the 4 components of circular flow?

Answer 2

1. Markets for outputs
2. Businesses
3. Markets for inputs
4. Households

Question 3

What is GDP?

Answer 3

Gross Domestic Product: The market value of all final goods & services produced within a country in a year

Question 4

What is GDP per person?

Answer 4

Total GDP divided by the population

Question 5

What type of goods and services are included in GDP? What type are not?

Answer 5

Included: Final goods and services. They are finished goods and services.

Not Included: Intermediate goods and services. They are goods or services used as inputs in the production of other products

Question 6

What are the 3 ways to measure GDP?

Answer 6

Adding up either:

1. Every dollar of spending
2. Every dollar’s worth of output produced
3. Every dollar of income earned

Question 7

What are the 4 different components of spending to measure GDP?

Answer 7

1. Consumption
2. Investment
   - Business Assets, Inventory, Residential Construction
3. Government Purchases
   - But not transfers
4. Net Exports
   - Exports minus imports

Question 8

What is the formula to calculate GDP from the perspective of total spending?

Answer 8

Y = C + I + G + NX

GDP = Consumption + Investment + Government Purchases + Net Exports

(Net Exports = Exports - Imports)

Question 9

What are the 6 limitations of GDP?

Answer 9

1. Prices are not values
2. Non-market activities - including household production - are excluded
3. The shadow economy is missing
4. Environmental degradation isn’t counted
5. Leisure doesn’t count
6. GDP ignores distribution

Question 10

What is Nominal GDP?
What is Real GDP?

Answer 10

Nominal GDP: GDP measured in today’s prices
Real GDP: GDP measured in constant prices

Question 11

How do you calculate % change in nominal GDP growth?
How do you calculate % change in real GDP growth?

Answer 11

%Δ in Nominal GDP = %Δ in Real GDP + %Δ in prices

%Δ in Real GDP = %Δ in Nominal GDP - %Δ in prices

Question 12

What is the Rule of 70?

Answer 12

Divide 70 by the annual growth rate to get the number of years until the original amount doubles