GDP

Question 1

Precisely define gross domestic product

Answer 1

GDP is the value of all officially reported final goods and services produced within a country in a given year

Question 2

Define Gross Domestic Income

Answer 2

GDI is all of the income generated by firms within a country during a year

Question 3

Why GDP is equal to GDI?

Answer 3

GDI is equal to GDP because it represents the total income generated by production in a given year. As GDP is the value of all production it also represents all of the income created in production during a year

Question 4

Define the term final good

Answer 4

When a product is purchased by its final user it is a final good.

Question 5

Define the term intermediate good

Answer 5

All the goods and services that comprise a final good are intermediate goods. Ie. fabric that is destined to be produced into shirts is an intermediate good

Question 6

Define the term value added and its relation to Income

Answer 6

• When a good reaches the end of production it is sold by a firm for the sum off all the value that has been added by firms during the production process. This figure represents all of the income generated by firms involved in production

Question 7

Understand what a change in inventory refers to and what category of expenditure it is included in

Answer 7

• At the end of the year any final good that has not been fully produced or not yet sold is counted into GDP as additional inventories at their current level of completion.

Question 8

Understand how a particular stage of production and thus value added are treated when it occurs abroad

Answer 8

The value added in a stage of production that occurs outside of the country is not counted toward GDP

Question 9

Identify the four expenditure categories of GDP are fully stated and what each category includes

Answer 9

1. Consumer spending (Includes all goods and services purchased by households except the purchase of housing
2. Investment spending(includes all goods and services purchased by firms except for housing, sub categories are ; equipment, construction, changes in inventories)
3. Government purchases (includes :public education)
4. Net exports (total exports – total imports)

Question 10

What is the formula for GDP Growth?

Answer 10

The amount of change / the prior year GDP

Question 11

Understand the difference between nominal GDP and real GDP

Answer 11

• Nominal GDP is in counted in current dollars

* Real GDP Is adjusted for inflation, Constant Dollars

Question 12

Understand the difference between nominal and real growth

Answer 12

• Nominal growth is counted in current dollars

* Real growth is counted in constant dollars

Question 13

Understand the difference between current and constant dollars

Answer 13

• Current dollars are today’s dollars. The amount of actual dollars you have
• Constant dollars are dollars adjusted for inflation

Question 14

Understand what adjusting for inflation means

Answer 14

Adjusting for inflation means taking inflation in to account. If nominal growth is 10% but there was 3% inflation then the real growth is 3%.

Question 15

Define the term GDP per capita.

Answer 15

Simply GDP per capita is GDP/ the number of people in the country.

Question 16

What is included in the Underground Economy?

Answer 16

• Income that is not reported, thus not included in GDP
o Illegal activity, drugs gambling
o Legal activity that is not reported in order to avoid paying taxes

Question 17

List 4 different ways in which real GDP per capita growth overstates the well-being of society

Answer 17

1. Non market production (ie. house work, cooking)
2. Negative externality (ie. pollution)
3. Depletion of natural resource base
4. Loss of leisure

Question 18

What is short run GDP growth? When is it possible? What causes it to occur and how is it modeled on the PPF ?

Answer 18

Results in an increase in the utilization of a countries existing production capacity. Only possible when GDP is not at full potential. Occurs when aggregate demand is lower than production capacity. This model would show the economy inside the PPF

Question 19

What is long run GDP growth? When is it possible? What causes it to occur and how is it modeled on the PPF

Answer 19

Long run growth is an increase in a countries production capability. This can only occur when existing production capacity is fully utilized and may occur do to uncovering of new manufacturing technology. It is illustrated by an outward shift in the PPF

Question 20

What is the meaning of the term Productivity?

Answer 20

A measure of the efficiency of production.

Question 21

What causes increases in labor productivity?

Answer 21

o New technology
o Size of work force
o Health of work force
o Discovery of additional natural resources

Question 22

Define the term inflation

Answer 22

A sustained increase in the general price levels of goods and services.