GDP

Question 1

What does it measure?

Answer 1

Total income of a nation

Question 2

Measure of both:

Answer 2

Total income and total expenditure of producing

Question 3

Income = Expenditure…

Answer 3

as every transaction has both a buyer and a seller

Question 4

GDP =

Answer 4

Consumer spending + Gov’t spending + Investment spending + (exports - imports)

Question 5

Definition

Answer 5

“GDP is the market value of all final goods and services produced within a country in a given period of time”

Question 6

“Market value”

Answer 6

Use of market prices to translate the many different goods/services available to a single measurement

• Market prices = Amount people are willing to pay
• The more expensive a good the more weighting it is given in GDP

Question 7

Excludes:

Answer 7

• Products produced and sold illegally
• Products both produced and consumed at home
• Work carried out by members of the family
• The sale of used items
• Items produced outside the borders of a country

Question 8

“final”

Answer 8

Final goods = Are consumed
Intermediate goods = Used as inputs in the production of other goods (If produced for a later date then counted as final until used)

Question 9

“in a given period of time”

Answer 9

Usually a year or a quarter

- For a quarter it is presented as an annual rate (multiplied by 4) and subject to seasonal adjustment

Question 10

The components of GDP

Answer 10

GDP= C + I + G + Nx

Question 11

Consumption (C)

Answer 11

= Spending by households

Question 12

Investment (I)

Answer 12

= The purchase of goods which will be used in future to produce more goods/services
Inc:
- Products produced but not sold immediately
- Capital equipment, inventories, and structures

Question 13

Government spending (G)

Answer 13

= Spending on goods/services by local and national gov’t

Question 14

Net exports (Nx)

Answer 14

= Exports - imports

Question 15

GDP per capita

Answer 15

= GDP/Population

= Average national income per head

Question 16

Real GDP

Answer 16

= Is not affected by changes in price
= Output x Prices in base year
- Disregards inflation; shows how overall production has changed over time

Question 17

A nominal increase

Answer 17

= An increase in prices

- Combination of both increased output + inflation

Question 18

The GDP deflator

Answer 18

= A measure of price level in comparison to price level in base year (shows how much inflation has occurred)
= Nominal GDP/Real GDP x 100

Question 19

GDP + Economic well-being

Answer 19

• Shows income and expenditure of average person (higher = happier)
• Does not truly reflect quality of life but higher GDP makes it easier to obtain things which can improve this
• Des not show distribution of income

Question 20

Consumer prices index

Answer 20

= Measures the overall prices of goods + services bought by the typical consumer (an increase = Inflation)
- Shows the cost of living
Inflation rate = 100x(CPI yr2 x CPI yr1)/CPI yr1

Question 21

Producer prices index

Answer 21

= Measures prices of goods + services bought by firms

- Reflects changes in CPI as higher cost to firms usually means higher costs to consumers

Question 22

Problems with CPI

Answer 22

1. Substitution bias
   - Prices do not all change the same, consumers respond to this by substituting more expensive goods for cheaper ones
2. Introduction of new goods
   - Greater variety may cause consumers to turn to cheaper alternatives
   - New goods and services which can reduce household expenditure are not immediately taken into account
3. Unmeasured quality change
   - If quality rises but price doesn’t consumers will get more for their money
4. Inflation can disproportionately affect some people more than others

Question 23

The GDP deflator vs CPI

Answer 23

= Both used to show how quickly prices are rising and often give similar results
But:
- GDP is goods produced, CPI is only the ones typically bought
- Popular imported goods only show up in CPI (eg. oil)
- CPI is a fixed basket of goods, GDP is constantly updated

Question 24

Correcting for the effects of inflation

Answer 24

Amount in today’s £ = Amount in yrT’s £ x (price level today/price level yrT)

Question 25

Indexation

Answer 25

= When a money amount takes into account the potential effects of inflation either by law or by contract

• eg. income tax brackets, real IR
• Illustrates rise/fall in purchasing power