Chapter 7 -Measuring GDP

Question 1

what is the definition of GDP?

Answer 1

The market value of all final G+S produced in a country at a given amount of time

Question 2

What is Real GDP?

Answer 2

it measures how the size of the economy moves over time.
it tracks changes in the amount of stuff we by that are valued at a CONSTANT price given for a specific year (base year)
price of base year x quantity of G+S

Question 3

What is Nominal GDP?

Answer 3

measures G+S valued at current prices
current price x quantity of G+S

Question 4

Expenditure approach

Answer 4

C + I + G + NX
the market value of a G+S at which it is bought and sold.

Consumption: spending by individuals and households -what is consumed has to be new.

Investments: what firms spend on productive inputs

Government: G+S bought by the government; spending that transfers resources to individuals does NOT count. (pension plans, unemployment benefits)

Net exports: exports - imports

Question 5

Income approach

Answer 5

measured by adding up everyone’s income in the country (does not include NX)

only for national income

Profit + Intrest + Wages + Rentals

Question 6

Value added approach

Answer 6

used to measure economic output

the difference between the sale value and the value of the inputs that went into it.
add up the value added at each stage of the process

Question 7

how do you calculate the GDP deflator?

Answer 7

It is a price index that measures the change over the entire economy

GDP deflator = NGDP / RGDP x 100

if prices have risen, then the GDP deflator will be higher than 100.
If prices have fallen, then the GDP deflator will be lower than 100

Question 8

How do you calculate the GDP per capita?

Answer 8

to get a better look at everyone’s average income, you divide GDP by population size.

Question 9

What do you use GDP growth rates for?

Answer 9

to track changes in the economy over time.

GDP (t) - GDP (t-1) / GDP (t-1). x 100

Question 10

What are some limitaitons of GDP?

Answer 10

1. doesn’t track household production (lemonade stands, local farmers market)
2. doesn’t track the underground economy (black market, drugs)
3. Environmental externalities, (the cost of fossil fuels going into the air)

Question 11

What is Fiscal Federalism?

Answer 11

When you pay taxes to the government, and in return they put money back into the economy through roads, parks, hospitals, schools etc.

Question 12

What is an Economic Recession?

Answer 12

a period of significant decline in economic activity (Covid-19)
a depression is a severe or extended recession