Chapter 7

Question 1

National Income Accounting

Answer 1

Used to measure a country’s total output (value of national economy)

Question 2

Microeconomics

Answer 2

The study of how individuals and firms manage resources

Question 3

Macroeconomics

Answer 3

The study of the economy on a broad scale, focusing on issues such as economic growth, unemployment, and inflation

Question 4

Definition of GDP

Answer 4

Gross Domestic Product:

1. Market Value
2. Of final goods and services
3. Produced within a country
4. In a given period of time

Question 5

Market Value

Answer 5

Common unit of goods and services; tells us that GDP is going to be a number measured in the local currency

Question 6

Final Goods and Services

Answer 6

Count only expenditures on final goods and services to find out how much a purchase contributed to GDP

Question 7

Produced Within a Country

Answer 7

Goods and services that count toward GDP are defined in terms of Location of production

Question 8

GNP

Answer 8

Gross National Product:
The sum of the market values of all final goods and services produced and capital owned by the permanent residents of a country in a given period of time, no matter location.

Question 9

Given Period of Time

Answer 9

GDP is calculated on a quarterly basis

Question 10

Expenditure Approach

Answer 10

Adding up all the money people spend buying final goods and services - omitting spending on intermediate goods. The sum will be the market value of all output sold in the economy

Question 11

Circular flow diagram

Answer 11

Shows that

National Production = National Expenditure = National income

Question 12

Three approaches to measuring GDP

Answer 12

1. Expenditure Approach
2. Income Approach
3. Value-Added Aproach

Question 13

Expenditure Approach and how to find total expenditure

Answer 13

Highlights the importance of consumer spending versus government purchases
Add: consumption, investment, government purchases, and net exports to find total expenditure

Question 14

Income Approach

Answer 14

Emphasizes information about the relative importance of different factors of production

Question 15

Value-added approach

Answer 15

Useful for tracking how goods are sold and resold

Question 16

Consumption

Answer 16

Measures spending on goods and services by private individuals and households

Question 17

Investment

Answer 17

Spending on productive inputs such as factories, machinery and inventories
Includes newly built houses but not old ones or renting

Question 18

Government Purchases

Answer 18

Goods and services bought by all levels of government (including consumption type purchases)
Money transfers do not count!

Question 19

Net Exports

Answer 19

Represents the value of goods and services produced domestically and consumed abroad minus the value of goods and services produces abroad and domestically

Question 20

Expenditure Equation

Answer 20

Expenditure = C+I+G+NX= Production

Question 21

The Income Approach

Answer 21

Income= wages+ Interest + rental income + profits

-gives the same result as the expenditure method in an economy without any imports and exports

Question 22

The Value-Added Approach

Answer 22

Avoids problems of double counting and is especially useful in clarifying the resale of existing goods
-looks at all transactions and the value they add to the economy

Question 23

What does an increase in GDP result in

Answer 23

An increase in output and an increase in prices

Question 24

Difference between real and nominal GDP

Answer 24

Real: focuses solely on output, controlling for price changes. Calculated based on goods and services valued at constant prices for a specific year.
Nominal: reporting GDP without controlling for price changes. Calculated based on goods and services valued at current prices.

Question 25

GDP Deflator

Answer 25

A measure of the overall change in prices in an economy using the ratio between real and nominal GDP

Question 26

What does macroeconomics compromise

Answer 26

Economic Growth
Inflation
Unemployment