Chapter 5 - MEASURING A NATION’S INCOME Flashcards
What two thing does GDP measure at once?
The total income of everyone in the economy and the total expenditure on the economy’s output of goods and services.
Why must income be equal to expenditure for an economy as whole?
Because every transaction has two parties: a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller.
How is GDP defined?
The market value of all final goods and services produced within a country in a given period of time.
What is the components of GDP?
GDP = Y
Consumption = C
Investment = I
Government purchases = G
Net exports = NX
Y = C + I + G + NX
What does the consumption stand for in GDP?
Spending by households on goods and services, with the exception of purchases of new housing.
What does the investments stand for in GDP?
Purchases of goods (such as business capital, residential structures, and inventories) that will be used to produce other goods and services in the future.
What does the government purchases stand for in GDP?
Spending on goods and services by local, state, and federal governments. It includes the salaries of government workers as well as expenditures on public works.
What does net exports stand for in GDP?
Net exports equal the foreign purchases of domestically produced goods (exports) minus the domestic purchases of foreign goods (imports).
What is real GDP? What does the change in real GDP reflect?
The production of goods and services valued at constant prices.
Changes in real GDP reflect only the change in the amounts being produced.
What must be true if total spending rises from one year to the next year?
1) The economy is producing a larger output of goods and services.
or
2) Goods and services are being sold at higher prices.
What is nominal GDP?
The production of goods and services, valued at current prices.
What is the reason to compute GDP? And why is real GDP better than nominal GDP?
-gauge how well the economy is performing
-real GDP measures the economy’s production of goods and services
-reflects the economy’s ability to satisfy people’s needs and desires
What is the formula for GDP deflator?
GDP deflator = Nominal GDP/Real GDP
What is the formula for inflation rate?
(GDP deflator (t) - GDP deflator (t-1))/GDP deflator(t-1)
Determine how much GDP and each of its components is affected (if at all):
Debbie spends $200 to buy her husband dinner at the finest restaurant in Toronto
Consumption and GDP rise by $200.
Determine how much GDP and each of its components is affected (if at all):
Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China.
Investment rises by $1800, net exports fall by $1800, GDP is unchanged.
Determine how much GDP and each of its components is affected (if at all):
Jane spends $1200 on a computer to use in her editing business. She got last year’s model on sale for a great price from a local manufacturer.
Current GDP and investment do not change because the computer was built last year.
Determine how much GDP and each of its components is affected (if at all):
General Motors builds $500 million worth of cars, but consumers only buy $470 million worth of them.
Consumption rises by $470 million, inventory investment rises by$30 million, and GDP rises by $500 million.
If the price of a hot dog is $2 and the price of a hamburger is $4, then 30 hot dogs contribute as much to GDP as what number of hamburgers?
15
Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each of which has a market price of $40. Collette buys one of them, while the other remains on the shelf of Barnaby’s store to be sold later. What is GDP here?
$80
What is the largest component of GDP?
Consumption
Suppose a cobbler buys leather for $150 and thread for $50 and uses them to produce and sell $350 worth of shoes to consumers. Which one of the following is the contribution to GDP?
$350
A Canadian buys a pair of shoes manufactured in Italy. How is the transaction treated in Canada’s national income accounts?
Net exports fall, while GDP is unchanged.
When a person buys a house, it affects which of the following component of GDP?
investment
What components of GDP (if any) would each of the following transactions affect?
A family buys a new refrigerator
GDP increases and C increase
What components of GDP (if any) would each of the following transactions affect?
Aunt Jane buys a new house
GDP increase and I increase
What components of GDP (if any) would each of the following transactions affect?
Ford sells a Thunderbird from its inventory
C increases and I decrease
What components of GDP (if any) would each of the following transactions affect?
You buy a pizza
GDP increase and C increase
