Chapter 10

Question 1

Front

Answer 1

Back

Question 2

What is Gross Domestic Product (GDP)?

Answer 2

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

Question 3

What are the components of GDP?

Answer 3

1. Consumers: Spending on goods and services (Consumption - C).
2. Businesses: Investment in capital goods like machinery (Investment - I).
3. Government: Spending on goods and services, including public employee salaries (Government Spending - G).
4. Foreign Sector: Exports minus imports (Net Exports - NX).
   GDP Formula: GDP = C + I + G + NX

Question 4

How do exports and imports affect GDP?

Answer 4

• Exports: Add to GDP (foreign consumers buy domestic products).
• Imports: Subtract from GDP (domestic consumers buy foreign products).
• Net Exports: Exports - Imports.

Question 5

What is the difference between nominal GDP and real GDP?

Answer 5

• Nominal GDP: Measures goods and services at current prices. Cannot compare across years due to changing prices.
• Real GDP: Measures goods and services at constant prices, adjusting for inflation. Allows year-to-year comparison.

Question 6

How do you calculate nominal GDP and real GDP?

Answer 6

• Nominal GDP = Price (current year) × Quantity (current year).
• Real GDP = Price (base year) × Quantity (current year).

Question 7

What is the GDP Deflator?

Answer 7

A measure of price level changes.
Formula: (Nominal GDP / Real GDP) × 100

Question 8

What does a GDP deflator of 200 mean?

Answer 8

• Prices are 100% higher than in the base year.
• Prices are 2 times higher than the base year.
• Prices are 200% of the base year’s prices.

Question 9

What does a GDP deflator of 125 mean?

Answer 9

• Prices are 25% higher than in the base year.
• Prices are 1.25 times higher than the base year.
• Prices are 125% of the base year’s prices.

Question 10

How do you calculate GDP Deflator if you have nominal GDP and real GDP?

Answer 10

1. Calculate Nominal GDP.
2. Calculate Real GDP.
3. Use the formula: (Nominal GDP / Real GDP) × 100.

Question 11

How do you calculate Real GDP if only nominal GDP and GDP deflator are given?

Answer 11

Formula: Real GDP = (Nominal GDP / GDP Deflator) × 100

Question 12

Is GDP a good measure of economic well-being?

Answer 12

GDP is a good measure of economic well-being but excludes:
- Leisure.
- Home production.
- Environmental quality.
- Income distribution.

Question 13

Why is a large GDP beneficial?

Answer 13

A large GDP indicates:
- Better healthcare.
- Improved educational systems.
- A higher standard of living.