Chapter 1

Question 1

GDP (definition)

Answer 1

gross domestic product is the market value of all final goods and services produced in a country in a given time period

Question 2

What is excluded from GDP

Answer 2

Non production transactions

Question 3

Examples of non production trans actions

Answer 3

Financial transactions:
public/private transfer payments
security transactions
Used item transactions

Question 4

What does GDP focus on

Answer 4

Final goods and services (we don’t want to double it)
wheat is not counted as GDP as wheat is usually used in something else so they don’t want to count it twice. same with flower* car is a final product but not apart of GDP

ONLY focus on final goods and services, not intermediate

Question 5

What is happening with products that GDP applies to

Answer 5

You are simply changing ownership, there is no created or lost value.

Question 6

What type of flow does GDP have

Answer 6

It has a circular flow of expenditure and income

Question 7

Two approaches to measure GDP

Answer 7

1. Aggregate expenditure approach
2. Income approach

Question 8

Gross

Answer 8

The depreciation of capital (capital consumption) is not accounted for

Question 9

Income approach - sources of income

Answer 9

• Wages, salaries, and supplementary labour income
• Corporate profits
• Interest and miscellaneous investment income
• Farmers’ income
• Income from non-farm unincorporated businesses
= Net Domestic Income (NDP) at factor cost.
• Add “net taxes” (Indirect taxes minus subsidies) and depreciation
= GDP.

Question 10

How investment is financed

Answer 10

Investment is financed from three sources:
▪National Saving
Private saving: S
Public saving (Government budget surplus): (T– G)
▪ Borrowing from the rest of the world (M– X)
I = S + (T– G) + (M– X)

Question 11

What is GDP a measure of

Answer 11

Production

Question 12

How does GDPs value change

Answer 12

It changes with prices

Question 13

Nominal GDP and Real GDP

Answer 13

Nominal - GDP at current prices
REAL - gdp at constant prices

Question 14

Two methods to deal with GDP and the price level

Answer 14

1. Constant price GDP
2. Chain-weighted output index

Question 15

The chain weighted output index

Answer 15

The chain-weighted output index method uses the
prices of two adjacent years to calculate the real GDP
growth rate.

Question 16

The chain weighted output index - STEPS

Answer 16

Step 1: Calculate Real GDPs using last year prices.
- Calculate growth rate.
Step 2: Calculate Real GDPs using this year prices.
- Calculate growth rate.
Step 3: Calculate the average of the two growth rates.
Step 4: Repeat steps 1-3 for each pair of adjacent years to
link real GDP back to the base year’s prices.

Question 17

Calculating the price level

Answer 17

The average level of prices is called the price level.
1. GDP deflator is an average of the prices of the goods
in GDP in the current year expressed as a percentage of
the base year prices.
2. Consumer Price Index (CPI)
A price index for only consumer goods and services.

Question 18

What would happen is both production and prices rise

Answer 18

Nominal GDP increases

Question 19

Application: economic growth

Answer 19

The economic growth rate is the percentage change in
the real GDP.
We measure economic growth so we can make:
▪ Economic welfare comparisons
▪ International welfare comparisons
▪ Business cycle forecasts