Chapter 5 Flashcards
Measuring a Nation's Income
What is the purpose of GDP?
GDP measures a country’s total income and total expenditure, providing an overall indication of economic performance and well-being
What are the four components of GDP?
Consumption (C): Spending by households on goods and services.
Investment (I): Spending on capital goods and inventories.
Government Purchases (G): Spending on goods and services by governments.
Net Exports (NX): Exports minus imports
What is the difference between nominal GDP and real GDP?
Nominal GDP values production using current prices.
Real GDP values production using constant base-year prices, accounting for inflation
Why is real GDP considered a better measure of economic well-being?
Real GDP reflects changes in output rather than changes in prices, isolating true economic growth
What is excluded from GDP?
Used goods.
Illegal market activities.
Goods and services produced at home for personal use.
Transfer payments like pensions or unemployment benefits
What is the formula for GDP using the expenditure approach?
DP=C+I+G+NX
Where
C = Consumption,
I = Investment,
G = Government purchases, and
NX = Net exports
How is the GDP deflator calculated?
GDP Deflator = (Nominal GDP/Real DGP) x 100
What is the formula for inflation rate using the GDP deflator?
Inflation Rate = )GDP Deflator (New) - GDP Deflator (old)/GDP Deflator (old)) x 100
How is the growth rate of real GDP calculated?
Growth Rate = (Real GDP (Current) - Real GDP (Previous))/ Real GDP (Previous) x100
What is the formula for calculating net exports (NX)?
NX = Exports - Imports
Why does total income in an economy equal total expenditure?
Every transaction has a buyer and a seller, so the amount spent by buyers equals the income received by sellers
How does GDP account for inventories?
Goods added to inventories are considered investment and counted in GDP. When goods are sold, they are subtracted from inventory investment
How do transfer payments like pensions affect GDP?
Transfer payments are excluded from GDP because they do not represent the production of goods or services
Why might a high GDP not indicate high well-being?
GDP excludes factors like income distribution, environmental quality, and non-market activities such as leisure and home production
What does the GDP deflator measure?
The GDP deflator measures the price level of all goods and services in an economy relative to a base year
Why is investment in GDP defined differently than in everyday language?
Investment in GDP includes spending on capital goods and inventories, not financial investments like stocks or bonds
What is the circular-flow diagram?
A visual model showing the flow of goods, services, and money in an economy between households and firms, demonstrating the equality of income and expenditure
What is the difference between GDP and GNP (Gross National Product)?
GDP measures the value of goods and services produced within a country’s borders.
GNP includes the income earned by a country’s residents abroad and excludes income earned by foreigners within the country
Why does GDP include only final goods and services?
Including only final goods avoids double counting, as the value of intermediate goods is already included in the final product
How do imports affect GDP?
Imports reduce GDP because they are subtracted from exports in the net exports (NX) calculation
What are the limitations of GDP as a measure of economic well-being?
Excludes non-market activities (e.g., home production, volunteer work).
Ignores income inequality.
Does not account for environmental degradation.
Excludes the underground economy
How is real GDP calculated using nominal GDP and the GDP deflator?
Real GDP = Nominal GDP/GDP Deflator x 100
What is the formula for per capita GDP
Per Capita GDP = GDP/Population
Why is consumption typically the largest component of GDP?
Consumption includes all spending by households on goods and services, such as food, clothing, and services, which constitute the majority of economic activity in most countries
How do government purchases differ from transfer payments in GDP?
Government purchases are spending on goods and services that directly contribute to GDP, while transfer payments (e.g., pensions) do not involve current production and are excluded
How does the base year affect real GDP calculations?
Real GDP uses prices from the base year to measure output, ensuring that changes in GDP reflect only changes in production, not price
What happens to GDP if a country legalizes an illicit market?
GDP increases as the production and sales of previously illicit goods are now officially measured and included in economic activity
Why might a natural disaster increase GDP in the short term?
Cleanup, repairs, and rebuilding efforts generate economic activity and increase measured GDP, despite the negative impact on overall well-being
