Chapter 4

Question 1

Real Domestic Gross Product: the quantity of final goods and services produced by the economy in a specified time period.

Answer 1

measures output and income. Real GDP is the quantity of final goods and services produced in the economy in a specific time period, say, one year measured in the market prices of a base year.

The production of goods and services generates incomes equal to the value of those goods and services. As a result, Real GDP is also the real income in the economy and the quantity of goods and services the economy can afford to buy.

Because we measure real GDP in the prices of a base year, the changes we see in real GDP are the result of changes in the quantities of goods and services produced and not the result of changes in prices. Increased quantities of goods and services provide for increased standards of living in the economy. Increase in prices do not!

As a result we define economic growth as an increase in REAL GDP.

Question 2

Economic Growth/Rate of economic growth.

Answer 2

An increase in REAL GDP/ Rate of economic growth is the annual percentage change in REAL GDP.

Question 3

Price Level

Answer 3

a measure of the average prices of all goods and services produced in the economy.

Question 4

Price Index

Answer 4

a measure of the price level in one year compared with prices in a base year.

Question 5

Consumer Price Index (CPI)

Answer 5

a measure of the cost of living in any one year to the cost of living in a base year. It’s a more comprehensive measure of the change in prices from one year to the next.

Question 6

Inflation

Answer 6

a persistent rise in the general price level.

Question 7

Employment

Answer 7

is defined as the number of adults (15 yrs of age and older) employed full-time and part time and self-employed.

Question 8

Unemployment

Answer 8

covers those not working but available for and seeking for work.

Question 9

Labour Force

Answer 9

is those adults who are employed plus those not employed but actively looking for work.

Question 10

Participation Rate:is the proportion of the surveyed population that is either working or unemployed.

Answer 10

It measures the size of the labour force relative to the surveyed population. Participation rate changes as people become more optimistic about finding employment, or discouraged by periods without employment.

Question 11

Discouraged Workers

Answer 11

want to work but are no longer looking for work because they believe suitable work is not available. As a result they are excluded from the measurement of the labour force and reduce the participation rate. Changes in the participation rate change the size of the labour force and the unemployment rate even if employment and the population are constant.

Question 12

Unemployment Rate:is the number of unemployed persons as a percentage of the labour force.

Answer 12

Because the size of the labour force depends on the participation rate, the choices people make about looking for work, the unemployment rate will rise if people become more optimistic about job prospects and begin to look for work, increasing the participation rate and the labour force.
On the other hand, unemployment rate will decline if some people become discouraged and give up looking for work, reducing the participation rate and labour force.

Question 13

Cyclical Unemployment

Answer 13

is unemployment that would be eliminated by a higher level of economic activity without putting increased pressure on wage rates and inflation.

Question 14

Frictional Unemployment

Answer 14

come from the dynamics of the labour market as changing labour force participation and employment opportunities mean that it takes time to match job openings with job candidates.

Question 15

Structural Unemployment

Answer 15

reflects differences in labour force characteristics and employment opportunities as the structure of the economy changes. In combination, frictional and structural unemployment make up the “full employment” level of unemployment.

Question 16

Natural unemployment rate

Answer 16

the unemployment rate at “full employment”.

Question 17

Employment Rate

Answer 17

is the percentage of the population 15 yrs and older that is employed.

Question 18

Recession:negative growth in REAL GDP

Answer 18

decline in economic activity, often defined as two consecutive quarters of negative growth in real GDP.

Question 19

Nominal GDP

Answer 19

the output of final goods and services, the money incomes generated by the production of that output, and expenditure on the sale of that output in a specific time period.

Question 20

Output Based GDP (value added)

Answer 20

the difference between the market value of the output of the business and the cost of inputs purchased from other businesses.

Question 21

Intermediate inputs

Answer 21

services , materials, and components purchased from other businesses and used in the production of final goods.

Question 22

Consumption Expenditure (C)

Answer 22

is expenditure by the household sector on currently produced final goods and service in one year. It includes expenditure food, clothing, housing, home appliances, transportation, entertainment, personal services, financial services and so forth.

Question 23

Investment (I)

Answer 23

is expenditure by business sector on currently produced final goods and services to be used in the future production of goods and services. Investment adds buildings, machinery, and inventories that business uses for the production of goods and services.

Question 24

Government Expenditure (G)

Answer 24

is the purchase of currently produced final goods and services by the government sector of the economy. It includes all government expediture except Old Age Security, EI benenfits and Social Assistance as well as interest payments on Gov’t Bonds.

Question 25

Exports (X)

Answer 25

purchases of our domestic goods and services by residents of other countries

Question 26

Imports (IM)

Answer 26

purchase of goods and services produced by other countries.

Question 27

Net Exports (NX)

Answer 27

the difference between exports and imports.