Chapter 9 Notes Flashcards
In the question, “How much value is created in a year?” the words “value is created” could be replaced by which phrase?
How much “income is earned” in a year
True, false, explain: Wealth and income are the same thing
False. Income is a flow that reflects value creation. Wealth is a stock of what you own, which is accumulated savings from past income earned.
True, false, explain: We actually measure income as the social gain from production
False. Though the true measure of income is social gain, we measure how much is paid for output that is produced.
Define GDP
GDP is the market value of all final goods and services produced within a country’s borders in one year.
What is a final good?
One that is sold to a final consumer
True, false, explain: The value of crystal meth production is not included in US GDP
True. Because we do not have reliable records of the production.
True, false, explain: Sales of used goods are not counted in GDP.
True. Because they have been previously counted, so to count them again would double count them.
True, false, explain: The value of a newly issued share of stock is counted in GDP
False. The money that comes from the stock sale will purchase capital, and to count both transactions would double count.
What are two approaches to calculating GDP?
The expenditure approach and the income approach.
Which approach does government use in calculating GDP. Why?
The income approach–because tax records give information about income.
Which is bigger, the dollar value of output produced in the economy or the dollar value of income earned in the economy? Why?
They are equal, because every penny gained from the sale of a final good is income for someone in the production process.
What are the four components of the expenditure approach?
Consumption, investment, government purchases, net exports.
Of the four components of GDP as measured by the expenditure approach, which is largest, second largest, and third largest?
In order: Consumption, Government purchases, Investment, Net Exports
What is the definition of Investment as regards the expenditure approach to GDP?
Production of capital goods, production of new residential housing, changes in inventories
True, false, explain: We measure Real GDP in order to reflect the fact that though illegal goods may destructive, they have value to those who buy them.
False. We measure Real GDP to adjust for inflation.
What is Real GDP?
It is what GDP would be if prices were the same as they had been in the base year.
Since we have Real GDP, why would we ever want to use nominal GDP?
As long as we are not comparing values of different numbers across time, where inflation could occur, there is nothing to gain from using nominal GDP.
What is the definition of economic growth?
The percentage change in Real GDP over a year’s time.
An examination of a graph of Real GDP over six decades reveals something about our economy. What does it reveal?
Our economy generally grows.
A very strong growth rate for the economy is
Over 3.5%
True, false, explain: We would be pleased to find out we are at a peak of economic activity
False. That means we are about to contract.
What is the definition of a recession?
Two successive quarterly declines in Real GDP.
Compare the 1982 recession and recovery to the latest recession and recovery.
The 1982 recession was as bad or worse than the latest recessions, but the recovery in 1982 was much stronger.
What is the definition of per capita GDP? If we know this number, what does it tell us about the economy (other than the definition)?
GDP/population. It tells us how well off the people in the economy are.
What does GDP tell us about an economy?
How big it is
True, false, explain: When we look a graph of five decades of GDP per capita we see that the average person is now worse off than before.
False. Wellbeing generally improves over time.
Which is bigger, US GDP Per capita or Canadian GDP Per capita? By how much?
US GDP Per Capita is bigger by about 20%
True, false, explain: The US is not the highest ranked country in terms of economic freedom, but its economic freedom index is rising.
False. The US is not the highest ranked country, and its ranking has fallen for the past five years.
True, false, explain: If China had a higher economic growth rate than the US, that would mean that it would be a better place to live than the U. S.
False. Growth rates tell one the direction of the economy. GDP per capita is the best measure of living standards.
True, false, explain: Since China is growing better than the US, they currently have better economic policies than the US.
False. Growth also depends on the direction of policy. If China’s policies are worse than the US, but are improving, they might have higher growth than the US.
What is the most recent quarterly US economic growth?
1/10 of 1%
What was US GDP in the most recent quarter?
$15.9 Trillion
