L2 - Measuring Economic Activity

Question 1

What is national accounting? Who is responsible in the UK?

Answer 1

Measures state of an economy at a given time, changes to an economy over time, differences across countries. Office of National Statistics (ONS)

Question 2

Explain two production approaches to GDP and why they are equivalent

Answer 2

Value added, value of final goods.

Question 3

Give one definition of GDP

Answer 3

Total market value of domestically-produced final goods and services over a given period

Question 4

Explain briefly why production = expenditure = income

Answer 4

In every transaction the buyer’s expenditure becomes the seller’s income

Question 5

Define a firm’s ‘value added’

Answer 5

the value of its outputs minus the value of the intermediate goods the firm uses to produce that good

Question 6

State the National Income Accounting Identity. What does it relate to?

Answer 6

Y = C + I + G + NX
C = Consumption
I = Investment
G = Government spending 
NX = Net exports

Question 7

Define Consumption (C).

Answer 7

The value of all goods and services bought by households.

Question 8

Define Investment (I).

Answer 8

Spending on capital/spending on goods bought for future use.

Question 9

Define gross fixed investment. What can it be known as?

Answer 9

Business + residential fixed investment. Gross Fixed Capital Formation (GFCF).

Question 10

Define Gross Capital Formation. What can it be known as?

Answer 10

GFCF + Inventory changes. Investment.

Question 11

Define Government spending (G). What does G exclude and why?

Answer 11

G includes all government spending on goods and services. It excludes transfer payments (eg unemployment payments) as they don’t represent spending on G/S.

Question 12

Define Net Exports (NX).

Answer 12

The value of total exports (EX) minus the value of total imports (IM).
NX = EX - IM

Question 13

Explain stock vs flow.

Answer 13

Stock - quantity measured at a point in time.

Flow - quantity measured per unit time.

Question 14

Define capital.

Answer 14

Inputs into production other than labour that are not used up in the production process.

Question 15

Define depreciation.

Answer 15

The deterioration of the capital stock due to wear and tear.

Question 16

What is Net Domestic Product (NDP)?

Answer 16

GDP - Depreciation.

Question 17

What are some important economic components not included in GDP?

Answer 17

Home production, goods or services transacted outside markets, used good transactions, housing services, government transfer payments to individuals.

Question 18

What does GDP not take into account?

Answer 18

A measure of well-being of a nations people, changes in environmental resources, inequality.

Question 19

What is the difference between nominal and real GDP?

Answer 19

Nominal GDP uses current prices, real GDP is an inflation-adjusted measure.

Question 20

What is a GDP deflator?

Answer 20

The ratio of Nominal GDP/Real GDP (using a base year).

Question 21

What is are the Laspeyres, Paasche and Fisher indices?

Answer 21

Laspeyres - changes in R-GDP using initial year prices.
Paasche - changes in R-GDP using final year prices.
Fisher - average L/P indices over a given period

Question 22

Define inflation rate.

Answer 22

Rate at which prices change over time.

Question 23

Explain two common measures of inflation.

Answer 23

GDP deflator value. Consumer Price Index (CPI) - measures the prices of a typical ‘consumption basket’ of goods.

Question 24

How do you compare GDPs of different countries?

Answer 24

Adjust N-GDPs to express in common currency, adjust by GDP deflators from common year.