Chapter 5

Question 1

MICROECONOMICS

Answer 1

The study of how households and firms make decisions and how they interact in markets

Question 2

MACROECONOMICS

Answer 2

The study of economy-wide phenomena, including inflation, unemployment, and economic growth

Question 3

GROSS DOMESTIC PRODUCT (GDP)

Answer 3

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

GDP is the most closely watched economic statistic because it is thought to be the best single measure of a society’s economic well-being.

Question 4

GDP Is the Market Value

Answer 4

GDP adds many different kinds of products into a single measure of the value of economic activity.

Question 5

Of All

Answer 5

It includes all items produced in the economy and sold legally in markets.

GDP also includes the market value of the housing services provided by the economy’s stock of housing.

There are some products, however, that GDP excludes because measuring them is so difficult. (Anything illegal, prostitution, 2nd hands goods)

For houses that are paid for, the government includes this owner-occupied housing in GDP by estimating its rental value.

Question 6

Final

Answer 6

GDP includes only the value of final goods.

The reason is that the value of intermediate goods is already included in the prices of the final goods.

An important exception to this principle arises when an intermediate good is produced and is added to a firm’s inventory of goods to be used or sold at a later date.

In this case, the intermediate good is taken to be “final” for the moment, and its value as inventory investment is added to GDP.

Question 7

Produced

Answer 7

GDP includes goods and services currently produced.

It does not include transactions involving items produced in the past.

When Ford produces and sells a new car, the value of the car is included in GDP.

When one person sells a used car to another person, the value of the used car is not included in GDP.

Question 8

Within a Country (Geographical Area)

Answer 8

GDP measures the value of production within the geographic confines of a country.

When a British citizen works temporarily in Canada, their production is part of Canadian GDP.

When a Canadian citizen owns a factory in Haiti, the production at their factory is not part of Canadian GDP. (It is part of Haiti’s GDP.)

Thus, items are included in a nation’s GDP if they are produced domestically, regardless of the nationality of the producer.

Question 9

In a Given Period of Time

Answer 9

GDP measures the value of production that takes place within a specific interval of time. Usually that interval is a year or a quarter.

GDP measures the economy’s flow of income and expenditure during that interval.

Question 10

The components of GDP: Y = C + I + G + NX

Answer 10

Y : GDP

C : Consumption

I : Investment

G : Government purchases

NX : Net exports

Question 11

The components of GDP: Consumption and Investment

Answer 11

CONSUMPTION: spending by households on goods and services, with the exception of purchases of new housing

INVESTMENT: spending on capital equipment, inventories, and structures, including household purchases of new housing

Governments impute or estimate rental value of houses to add to GDP

Question 12

The components of GDP: Gov Purchases and Net Exports

Answer 12

GOVERNMENT PURCHASES: spending on goods and services by municipal, territorial, provincial, and federal governments

NET EXPORTS: the value of a nation’s exports minus the value of its imports; also called the trade balance

When the government pays the salary of a Canadian Forces general, that salary is part of government purchases.

When a domestic household, firm, or government buys a good or service from abroad, the purchase reduces net exports—but because it also raises consumption, investment, or government purchases, it does not affect GDP.

Question 13

The Components of Canadian GDP: Perentage Breakdown for Total Expenditure and Components

Answer 13

C = 56%
I = 23%
G = 22%
NX = -2% (29-31%)

Question 14

REAL VERSUS NOMINAL GDP

Answer 14

If total spending rises from one year to the next, one of two things must be true:

*The economy is producing a larger output of goods and services.
Goods and services are being sold at higher prices. *

When studying changes in the economy over time, economists want to separate these two effects.

In particular, they want a measure of the total quantity of goods and services the economy is producing that is not affected by changes in the prices of those goods and services.

To do this, economists use a measure called real GDP.

Question 15

REAL VERSUS NOMINAL GDP Defined

Answer 15

NOMINAL GDP: the production of goods and services valued at current prices (price * quantity; going to the market and seeing a price is nominal)

REAL GDP: the production of goods and services valued at constant prices (nominal adjusted for inflation; assume there is not inflation)

Question 16

GDP Deflator

Answer 16

GDP deflator is a measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.

GDP Deflator = (Nominal/Real) * 100 (N comes before R)

Because nominal GDP and real GDP must be the same in the base year, the GDP deflator for the base year always equals 100.

The GDP deflator for subsequent years measures the change in nominal GDP from the base year that cannot be attributable to a change in real GDP.

Question 17

Inflation

Answer 17

Economists use the term inflation to describe a situation in which the economy’s overall price level is rising.

The inflation rate is the percentage change in some measure of the price level from one period to the next.

Inflation in Yr 2 = ((GDP deflator in Yr 2 - GDP deflator in Yr 1)/ GDP deflator in Yr 1) * 100

Question 18

GDP and Economic Well-Being

Answer 18

Some things that contribute to a good life (well-being) are left out of GDP.

• Leisure.
• Activities that take place outside the markets
• The quality of the environment
• The distribution of income

Countries with higher real GDP or real GDP per capita do very well

Question 19

GDP and Qaulity of Life

Answer 19

GDP itself tells very little; Switzerland’s gross domestic product is much lower than that of India or China, yet Swiss citizens have one of the highest standards of living in the world.

The difference, of course, is population. Switzerland is a small country, so its GDP is relatively small, despite its wealth. The appropriate comparison is per capita GDP.

A more interesting question is: “Is per capita GDP a good measure of economic well-being?” Or, worded another way: “What constitutes economic well-being?”

While per capita GDP is not a direct measure of economic well-being, it can be used as a proxy for direct measures. The wealthiest countries have per capita incomes over 10 times higher than the poorest.

Question 20

The Circular-Flow Diagram

Answer 20

Economies total expenditure = total income
2 participants: Households and Firms
2 Markets: Goods and services and Factors of Production

Inner Circle (Flows of inputs and outputs):
Households (Have labour, land, capital) –> Market for Factors of Production (go here to sell degree to get job) –> Firms (they combine factors of production to obtain goods and services) –> Markets for goods and services (frims sell there goods and they are bought by households)

Outer Cirle (Flow of Dollars):
Frims (pay wages and rent) –> Market for Factors of Production (this is the payment for the households that do all the labour and work) –> Households (They got income from the previous section; for there work) –> Market for Goods and Services (Households spend their income to get goods) –> Firms (Get the money spent by households on goods and services, they get it as revenue)

Question 21

Goods and Services

Answer 21

GDP includes both tangible (food, clothing, cars) and intangible services (haircuts, housecleaning, dentist visits).

Question 22

Canadian GDP by Income

Answer 22

Table showing:
Compentation of Employees: 52%
Gross Operating Surplus: 27%
Gross Mixed Income: 12%

Question 23

Real GDP over recent History in Canada

Answer 23

From 1970 to 2021 we have only gone up!
We had around 8 recession whre GDP decline but as a whole our GDP has gone up. Real GDP has gone up over the years for Canada