Chapter 1

Question 1

What is GDP?

Answer 1

• Used to measure the performance of the overall economy
• Total market value of all final goods and services produced within a specific territory ina a given period of time
• Does not include intermediate good- raw materials

Question 2

What are the three ways of measuring GDP?

Answer 2

• Production measure
• Expenditure measure
• Income measure

Question 3

What is the production measure of GDP?

Answer 3

• The number of goods produced in the economy
• Quantity of goods sold X price
• Revenue genreated by each producer = Value of intermediate goods
• Only new production of goods and services count
  *

Question 4

What is the expenditure measure?

Answer 4

• The total purchases in an economy

Question 5

What is the income measure of GDP?

Answer 5

• Measures the sum of all income earned in the economy
• (E.g. Employee compensation, wages, salaries, employee benefits, net interest, corporate profts …)
• Deperciation- Waring down of capital
  
  • Apart of the income approach, as some of the income is paid towards the depreciation of capital. The deterioration of the capital stock due to wear and tear
• GDP- Depreciation = net domestic product

Question 6

What is depreciation?

Answer 6

• Apart of the income approach, as some of the income is paid towards the depreciation of capital. The deterioration of the capital stock due to wear and tear
• GDP- Depreciation = net domestic product
• Depreciation is the consumption of capital and shows the cost of production, therefore removing it from GDP shows the net result of economic activity

Question 7

What is the impact of social secuirty payments to GDP?

Answer 7

Do not affect them, as this is just a transfer of income that already exisits and is not in exchange for goods and services

Question 8

What share of GDP goes to labour?

Answer 8

2/3

Question 9

What proportion of GDP goes to capital?

Answer 9

1/3

Income that is associated with machinery

Question 10

What is the relationship between income and expnediture?

Answer 10

Income = expenditure

• Every transaction has a buyer and a seller

Question 12

What things change GDP?

Answer 12

• Price
• Quantity

Question 13

What is real GDP?

Answer 13

Keeps prices constant (Isolate effect on quantities)

Question 14

What is nominal GDP?

Answer 14

• Use prices and quantities of the specific year
• = Price level X real GDP
  *

Question 15

What is the equation for the percentage change in nominal GDP?

Answer 15

Percentage change in price level + percentage change in real GDP

Question 16

Implict GDP price deflator

Answer 16

Shows what’s happening to the overall level of prices in the economy

Deflate nominal GDP to yield real GDP

• Only domestic goods
• Allows for basket to change

Question 17

Consumer price index

Answer 17

Shows price increases when the quantities are held constant

Basket is expressed as current year prices over previous year prices

Question 18

What are issues with measuring Real GDP and price level?

Answer 18

• Price of goods change overtime (Subsitution effect cannot be seen in CPI)
• Quality of goods change overtime (E.g. technological advancements)
• New goods and services are introduced, some old become obsolete

Question 19

What is a stock?

Answer 19

Quantitiy measured at a given point of time

Question 20

What is a flow?

Question 21

Impact of inventories

Answer 21

• Firms profits being reduced in order to pay workers wages, is just a distribution
• Increase in inventories is investmetn by firms, therefore increased expenditure by the firms owners. Production increases just as much as production for final sale, but the sale of inventory combines positive spending (the purchaser) and negative spending (inventory disinvestment)

Question 22

How is the value added calculated?

Answer 22

Value of firms output - value of intermediate goods that the firm purchased

Question 23

What is an imputed value?

Answer 23

Estimated value of goods and services

• E.g. Homeowners rent, even though they don’t have to pay rent

Question 24

Percentage change in (P x Y)

Answer 24

= Percentage change in (Y) + Percentage change in (P)

Question 25

Percentage change in (Y/L)

Question 26

What is a Laspeyres index?

Answer 26

Price index with a fixed basket of goods

Question 27

What is a Paasche index?

Answer 27

Price index with a changing index

• Understate the increase in cost of living as it doesn’t show the decrease in welfare that comes from the subsitution of more expensive goods

Question 29

How would you find the real GDP of China in US prices?

Answer 29

Real GDP (US prices China) = Price levels (US) x Real GDP (China)