GDP and the Measurement of Progress

Question 1

Definition of Gross domestic product

Answer 1

Gross domestic product is the market value of all final goods and services produced within a country in a year.

Question 2

Definition GDP per capita

Answer 2

GDP divided by a country’s population

Question 3

Definition intermediate goods and services

Answer 3

Intermediate goods and services are sold to firms and then bundled or processed with other goods or services for sale at a later stage.

Question 4

Definition final goods and services

Answer 4

Goods and services which are sold to final users and then consumed or held in personal inventories.

Question 5

Why does GDP not include sales of used goods?

Answer 5

GDP is meant to measure production

Question 6

Definition Gross national product

Answer 6

GNP is the market value of all final goods and services produced by a country’s permanent residents, wherever located, in a year.

Question 7

What’s the difference between GNP and GDP?

Answer 7

GDP measures the total value of goods and services produced within a country’s borders, while GNP measures the total value of goods and services produced by a country’s resident, regardless of location.

Question 8

What does the growth rate of GDP tell us?

Answer 8

Growth rate of GDP tells us how rapidly the country’s production is rising of falling over time.

Question 9

How do you calculate the growth rate of GDP?

Answer 9

To compute the growth rate of GDP from 2024 to 2025 you only need two numbers: GDP at the end of 2024 and at the end of 2025. Then just calculate the percentage change:

((GDP2025 - GDP 2024) / GDP2024) x 100

Question 10

What’s the difference between nominal and real GDP?

Answer 10

Nominal growth rate does not adjust for price changes, whereas the growth rate of real GDP does.

Question 11

Definition of Nominal GDP

Answer 11

Nominal GDP is calculated using the prices at the time of sale.

Question 12

When wanting to compare GDP over time, is it better to use real GDP or nominal GDP?

Answer 12

If we want to compare GDP over time, we should always compare real GDP.

Question 13

Definition GDP deflator

Answer 13

The GDP deflator is a price index that can be used to measure inflation.

Question 14

How is the GDP deflator calculated?

Answer 14

The GDP deflator is simply the ratio of nominal to real GDP multiplied by 100:

GDP Deflator = (Nominal GDP/ Real GDP) x 100

Question 15

Definition Recession

Answer 15

A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.

Question 16

Define business fluctuations/ business cycles.

Answer 16

Business fluctuations or business cycles are the short run movement in real GDP around its long-term trend. Defining when a recession begins and ends is not always obvious, in part because economic data are often revised over time.

Question 17

What are the two most common ways of splitting GDP?

Answer 17

National spending approach to GDP:
Y = Consumption + Investments + Government purchases + Net Exports

Factor Income approach to GDP:
Y = Wages + Rent + Interest + Profit

Question 18

Define Consumption spending

Answer 18

Private spending on final goods and services. Most are made by households.

Question 19

Define Investment spending

Answer 19

Investment spending is a private spending on tools, plant, and equipment that are used to produce future output.

Question 20

Define government purchases

Answer 20

Government purchases include spending on tanks, airplanes, office equipment, and roads, as well as spending on wages for government employees.

Question 21

Define Net exports

Answer 21

Net exports are exports minus imports

Question 22

Why do economists split GDP?

Answer 22

Each of the ways of splitting GDP throws a different light on the economy.

Economists who study business fluctuations are often interested in splitting GDP according to the national spending identity because consumption, investment, government purchases, and net exports behave differently over time.

Question 23

Why is the factor income approach to splitting GDP useful?

Answer 23

The factor income approach is useful if we are thinking about how economic growth is divided between employee compensation, rent, interest, and profits

Question 24

What are the 4 underlying problems with using GDP as a measure of output and welfare?

Answer 24

1. GDP does not count the underground economy
2. GDP does not count nonprice production
3. GDP does not count leisure
4. GDP does not count bads: Environmental Costs
5. GDP does not measure the distribution of income

Question 25

Why are underground market transactions bad when using GDP to measure output and welfare?

Answer 25

Because they are omitted from GDP. Nations with a great deal of illegal and off-the-books activities are not as poor as they appear in the official GDP statistics.

Question 26

Why does GDP not accounting for nonprice production lead to problems when measuring output and welfare?

Answer 26

Non-price production occurs when valuable goods and services are produced but no explicit monetary payment is made.