GDP/Inflation

Question 1

Calculated Expenditure Approach

Answer 1

GDP = C+G+I+NX

Consumption of final goods + Government spending on final goods + Investment in tools and equipment for further output + Net exports

Question 2

Resource Cost and Income Approach

Answer 2

GDP = Aggregate Income + Non-Income Costs + Net Foreign Income

Question 3

Aggregate Income

Answer 3

Wages, rent, interest, profit (except corporations’ profit)

Question 4

Non-Income Costs

Answer 4

Indirect business taxes (e.g. sales or license taxes) and depreciation

Question 5

Net Foreign Income

Answer 5

Net income earned by the rest of the world from us

Question 6

GDP Deflator

Answer 6

Adjusts GDP for inflation.

GDP Deflator = ((This Year’s Output * This Year’s Prices) / (This Year’s Output * Base Year’s Prices)) * 100

Question 7

Real GDP

Answer 7

GDP respective to the Deflator.

Real GDP = ((This Year’s Output * This Year’s Prices) / (GDP Deflator)) * 100

Question 8

Consumer Price Index

Answer 8

CPI tracks inflation using a constant basket of goods; used for social security.

Question 9

Problems with GDP

Answer 9

• Does not track non-market goods
• Underground economies = not taxed or tracked
• Quality of the environment is not measured
• Cannot quantify leisure time

Question 10

Economic Costs of Inflation

Answer 10

1. Shoe-leather costs
2. Money illusion
3. Menu cost
4. Uncertainty of future price levels
5. Wealth redistribution
6. Price confusion
7. Tax distortions