Chapter 7 - Measuring a Nation's Income

Question 1

Gross Domestic Product is defined as?

Answer 1

The market value of all FINAL goods and services produced WITHIN a country in a given period of time

Question 2

A farmer sells wheat to a miller for $200. The miller makes the wheat into flour and sells it to a baker for $400. The baker makes the bread from flour and sells it to a grocer for $600. The grocer sells the bread to the public for $800. The effect on GDP is:

Answer 2

An increase of $800

Question 3

If a transaction is not declared to the GOVT (e.g. cash payment/trade), as a result the GDP will?

Answer 3

Be unchanged

Question 4

Ito lives in Japan and buys a new Toyota for 7.24 million yen in 2014. After driving it around for one year, he sells it to his neighbour in 2015 for 6 million yen. As a result:

Answer 4

Japanese GDP in 2014 will rise by 7.24 million yen; Japanese GDP in 2015 will remain unchanged

Question 5

If you send a gift of $1000 to your sister in Wellington, how will GDP be affected?

Answer 5

GDP will be unaffected as the $1000 represents a transfer, not a purchase

Question 6

A retailer imports $100,000 worth of clothing from China and sells it in New Zealand for a total of $160,000. Of her $60,000 profit, $20,000 is paid to staff as wages, and $40,000 is retained by the retailer as her earnings. All amounts are correctly declared to the government. The effect of this retailer’s activity on GDP will be:

Answer 6

An increase of $60,000

Question 7

Why is GDP per person not a perfect measure of the well-being of individuals in society?

Answer 7

GDP excludes things such as leisure, environmental quality, crime rate, volunteer activities…

Question 8

Are clothes purchased included in the GDP?

Answer 8

Clothes purchased are included in the consumption component of GDP

Question 9

What are intermediate goods?

and is the value of intermediate goods included in GDP?

Answer 9

Intermediate goods are the semi finished goods used as inputs to produce a final product. (e.g. wheat to flour to bread for sale)

No, the value of intermediate goods is not included in the GDP

Question 10

Why is it desirable for a country to have a high GDP?

Answer 10

Because a high GDP means that a country’s production is increasing/maintaining a high level. Therefore consumers will be earning more, spending more, and receiving a higher quality of life (e.g. more education, health care)

Question 11

What is an example of something that would benefit the GDP but be undesirable?

Answer 11

Exploitive Ventures within a country. E.g. Oiling drilling in NZ would benefit the GDP but at an environmental cost..

Question 12

Why are transfer payments excluded from the GDP?

Answer 12

Because nothing has been produced

Question 13

Why are goods and services produced and consumed at home not excluded in GDP?

Answer 13

Because there is no transaction record

Question 14

Why might well being be equal to two countries, although one has a higher GDP than the other?

Answer 14

The country with a lower GDP may be more self sufficient. (e.g. India produces and consumers a lot of its goods at home, therefore no transactions are created)

Question 15

How do you calculate nominal GDP?

Answer 15

Nominal GDP = Value of goods and services at current year prices. (Q x P)

Question 16

How do you calculate real GDP?

Answer 16

Real GDP = Value of goods and services at base level prices (Q x Pbase)

Question 17

Why do economists not used nominal GDP to measure economic growth?

Answer 17

Because nominal GDP is distorted by the price effect

Question 18

What is the GDP deflator and what does it reveal?

Answer 18

A Measure of price level calculated as the ratio of nominal GDP to real GDP. It reveals the rise in nominal GDP that is attributable to a rise in prices rather than quantities produced.

Question 19

How is the GDP deflator calculated?

Answer 19

(Nominal GDP/Real GDP) x 1000

Question 20

Can real GDP figures of an undeveloped country be used to measure the prosperity of people living in that country?

Answer 20

No, often the GDP figure in undeveloped countries is understated because are large amount of non-market activities take place (Black market/cash trading), where no invoices are involved. This means that a countries standard of living may appear far lowing than it really is.

Question 21

Why is GDP of a developed country a reasonable measure of prosperity, but not an undeveloped country?

Answer 21

Because a developed country usually will have a far smaller black market. Most economic activities are recorded in a developed economy.

Question 22

The per capita real GDP in NZ is $37,000. Is this a clear indication of the standard of living in NZ that people have?

Answer 22

No, as this is the average GDP per capita. The distribution of income is not given, averages can be misleading as the national cake is not divided equally.

Question 23

Why might a country with a lower GDP be rated as a better place to live than other countries with high GDPs?

Answer 23

Because GDP does not take into account factors such as quality of life, cleanliness of the environment, Leisure, Rate of crime etc