Chapter 20

Question 0

Parts to GDP:

Answer 0

• Market Value: How much output is produced in an economy. Measured using current market prices.
• Final Goods and Services: Final good or Intermediate Good
• Produced within a country:
• Produced in a given time period:

Question 1

Definition of GDP:

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

Circular flow of Expenditure and Income

Answer 2

• Households
• Firms
• Factor Markets
• Good Markets: Government or Rest of the world

Question 3

GDP Equals: Expenditure Equals Income

Answer 3

GDP=C+I+G+X-M
Y=C+I+G+(X-M)
C=consumer
I=Income
G=Gov. Expenditure
X=Exports
M=Imports

Question 4

Gross Definition

Answer 4

Means before deducting the depreciation of capital.

Opposite of gross is “Net”.

Question 5

Net Definition

Answer 5

Means, after deducting the depreciation of capital.

Question 6

Depreciation:

Answer 6

Decrease in the value of a firm’s capital that results from wear and tear and obsolescence.

Question 7

Gross Investment=

Answer 7

Net Investment + Depreciation.

Question 8

Measuring GDP, Expenditure Approach

Answer 8

GDP= C+ I + G + (X-M)

Question 9

Measuring GDP, Income Approach

Answer 9

Two Broad categories:

1. Wage, and other labour income
2. Othe factor incomes.

This is by summing the incomes that firms pay households.

Question 10

Two adjustments must be made to get GDP:

Answer 10

1. Indirect taxes (no production, imports) less susidies are added to get from factor cost to market prices.
2. Depreciation is added to get from net domestic income to gross domestic income.

Question 11

Real GDP

Answer 11

Value of final goods and services produced in a given year when valued at “valued at the prices of a reference base year”.

Question 12

Nominal GDP:

Answer 12

Value of goods and services produced during a given year valued at the prices that prevailed in that same year.

(this is just a more precise name for GDP).

Question 13

The uses and limitations of Real GDP

Answer 13

To compare the standard of living over time.

To compare the standard of living across countries.

Question 14

Standard of living over time:

Answer 14

Real GDP per person is real GDP divided by the population.
Real GDP tells us the value of goods and services that the average person can enjoy.
This removes any influence that rising prices and rising cost of living might have on our comparison.

Question 15

Potential GDP

Answer 15

When all economy’s labour, capital, land and entrepreneurial ability are fully employed.

As well, we calculate:
Growth of potential GDP per person
Fluctuations of real GDP around potential GDP.

Question 17

Business Cycle

Answer 17

Periodic but irregular up and down movement of total production and other measures of economic activity.

Question 18

Business Cycle:
Every cycle has two phases:
And two Turning points

Answer 18

Two Phases:

1. Expansion
2. Recession

Turning points:

1. Peak
2. Trough