L1 GDP & L2 Business Cycle

Question 1

GDP definition

Answer 1

Gross dominal product
Market value of final products made in a country in a given period of time.
Intermediate goods not included
Produced by a country only
Flow can be zero; goods made in the period only -not wealth not stock

Question 2

Draw Circular flow of income

Answer 2

Household
Factors and goods market
Firms
Govt.
Rest of the world

Question 3

Income and expenditure approach. Why different?

Answer 3

Uncertainty
Statistical discrepancy in both approaches
Measurement errors
Limitations

Question 4

Measure GDP

Answer 4

Income approach:
Y
Compensation of employees (labour income)
Gross operating surplus; profit & public surplus
Mixed income; rent & self employment
Adjustments; indirect taxes-subsidies

Expenditure approach:
C+I+G+(X-M)

Question 5

GDP Types

Answer 5

Nominal GDP:
GDP valued at current price. Diff from rGDP due to inflation.

Real GDP:
GDP valued at same base price at reference year. Shows changes in quantity.
Important as it shows:
Actual amount of goods produced
Real purchasing power
Used to:
Compare changes in SOL over time or between countries. PPP Prices used for comparing real level.
Extra info:
Real GDP fluctuate more compared to potential GDP, caused by business cycle.

Question 6

Issues of rGDP

Answer 6

Cannot compare currency terms vs ppp prices.

Limitations:
Only goods bought in markets are included. Others?
-household prodn
-leisure time -SOL, happiness
-underground economic activity
-environmental quality -cost of polln
-externalities
-safety
-income inequality

Question 7

HDI GNNP vs RGDP

Answer 7

Better - future signal
Broader measure and better decision making

Worse - Difficult to calculate eg. Pollution, controversial
Mish mash, less informative and confusing

Question 8

Business Cycle definition and types

Answer 8

Periodic irregular up and down movement of production or economic activity.

Types:
Expansion GDP rise
Recession GDP fall

Question 9

Alternatives to rGDP

Answer 9

GNNP
Green Net National Production
-degraded environment
-net production (depreciated assets)
-depletion of natural resources
-national income (income to foreigners not included)

HDI
GDP +
-health
-education (2/3 adult literacy rate & 1/3 third level gross enrollment rate) 
-life expectancy (at birth)
-real income pp

Question 10

Draw rGDP vs pGDP graph

Answer 10

Peaks and troughs
Expansions and recessions
Double dips

Question 10

rGDP vs pGDP changes

Answer 10

Growth in rGDP is not real growth eg. Change in technology, unless pGDP increase
Not sustainable as it goes back down

pGDP increases net PPF as consumption and production is higher.

Know when it is pGDP that increase - can make or develop policies for economic growth