Chapter 4: GPD: Measuring Total Production and Income

Question 1

Business Cycle

Answer 1

The alternating periods of expansion and recession

Question 2

Expansion

Answer 2

Period during which total production and total employment are increasing

Question 3

Recession

Answer 3

Period during which total production and total employment are decreasing

Question 4

Economic Growth

Answer 4

The ability of an economy to produce increasing quantities of goods and services

Question 5

Gross Domestic Product

Answer 5

The market value of all final goods and services produced in a geographic area during a period of time

Question 6

Final Good or service

Answer 6

A good or service purchased by a final user

Question 7

Intermediate goods

Answer 7

A good or service that is an input into another good or service

Question 8

Income approach

Answer 8

GDP can be measured by adding up all the income in the economy

Question 9

Expenditure Approach

Answer 9

Measuring GDP by adding up all the different types of expenditure in the economy

Question 10

What are the four broad categories when measuring GDP through the expenditure method

Answer 10

Final consumption, gross fixed capital formation, investment in inventories and net exports

Question 11

Final Consumption

Answer 11

All domestic purchases of goods and services used to satisfy individual or community needs and wants
- Largest single component of expenditure approach
- Can be divided into expenditures of households, not-for-profit organizations that serve households, and government

Question 12

Gross fixed capital formation

Answer 12

The purchases of fixed assets by firms, governments, and households

Question 13

Fixed assets

Answer 13

Tangible goods that will provide benefits over a long period of time and cannot be easily converted into cash

Question 14

Investment in inventories

Answer 14

Finished products kept on hand to sell or inputs to turn into finished products

Question 15

Net Exports

Answer 15

Value of a country’s total exports minus its imports

Question 16

Exports

Answer 16

Goods and services produced domestically but sold to foreign firms, governments, and households

Question 17

Imports

Answer 17

Goods and services produced in foreign countries and purchased by Canadian firms, governments, and households

Question 18

Statistical discrepancy between expenditure and income approach

Answer 18

• Differences due to small errors in the original data and different estimation techniques
• Controlled for by taking the average of both methods

Question 19

What information does calculating GDP with the income approach provide

Answer 19

How much each factor of production is recieving

Question 20

What information does calculating GDP with the expenditure approach provide

Answer 20

what the output produced in a country is being used for

Question 21

The expenditure approach in macroeconomic models

Answer 21

Older model
Y=C+I+G+Nx
- Y is GDP
- Consumption is final consumption done by households
- Investment is the money spent by firms on fixed capital formation and inventories
- Government spending is the final consumption spending and fixed capital formation done by government
- Net exports

Question 22

What are the shortcomings of GDP as a measure of total production

Answer 22

Does not include household production and informal economy

Question 23

Household production

Answer 23

Goods and services people produce for themselves

Question 24

Informal Economy

Answer 24

Buying and selling of goods and services that is concealed from the government to avoid taxes or regulations or because the goods or services are illegal

Question 25

Shortcomings of GDP as a measure of well-being

Answer 25

Does not include value of leisure, State of environment, Crime and other social problems, division of goods and services

Question 26

Nominal GDP

Answer 26

The value of final goods and service evaluated at current-year prices
- Increase represents an increase in quantity or price

Question 27

Real GDP

Answer 27

The value of final goods and services evaluated at base-year prices
- Increase represents an increase in quantity

Question 28

Price Level

Answer 28

Measures the average prices of goods and services in the economy

Question 29

GDP Deflator

Answer 29

A measure of the price level, calculated by dividing nominal GDP by real GDP and multiplying by 100

Question 30

Gross National Income

Answer 30

The value of incomes received by Canadians for the use of their factors of production no matter where in the world those factors of production are used

Question 31

Net National Income

Answer 31

GNI minus consumption of fixed capital

Question 32

Depreciation

Answer 32

The value of worn-out machinery, equipment and buildings
- also referred to as the consumption of fixed capital

Question 33

Household income

Answer 33

The income received by households
- calculated by subtracting the earnings that corporations retain rather than pay to shareholders in the form of dividends and add payments received by households from the government in the form of transfer payments or interest payments

Question 34

Household disposable income

Answer 34

Household income minus personal tax payments

Question 35

Divisions of income

Answer 35

Overall referred to as gross domestic income
- Labor income: payments that households receive for supply labor to firms
- Corporate operating surplus: the profits that get paid to households that own shares in these operations
- small business income (mixed income): wages and profits earned by owners of unincorporated businesses
- taxes on production and imports