lecture 2 Flashcards
What is the difference between Nominal GDP and Real GDP?
- Nominal GDP: Calculated with current prices; affected by both quantities and prices.
- Real GDP: Calculated with constant prices (fixed year); affected only by quantities, used for time-period comparisons.
What does a high unemployment rate indicate about the economy?
A high unemployment rate suggests that the economy is not using its resources efficiently, which usually points to economic distress or recession.
Why is measuring GDP challenging?
- Price changes over time complicate measurement.
- New products and illegal activities are hard to account for.
- Home production and financial services are often excluded.
What is the GDP deflator, and how does it relate to inflation?
The GDP deflator is the ratio of Nominal GDP to Real GDP. It measures the average price level of all goods and services produced in an economy, excluding energy sources. It is used to track inflation.
What is the difference between Gross National Product (GNP) and Net National Product (NNP)?
- GNP: Total market value of goods and services produced by nationals, including abroad activities.
- NNP: GNP minus depreciation of capital goods.
Why is the unemployment rate an important indicator of economic health?
It directly affects the well-being of the population. A high rate signals inefficiency in resource use, while a low rate suggests a healthy, functioning economy.
What is the relationship described by Okun’s Law?
Okun’s Law states there is a negative relationship between output growth and unemployment. As GDP grows, unemployment typically decreases, and vice versa.
How does inflation affect income distribution, and who is most impacted?
- Flexible wage earners: Their wages typically rise proportionally with inflation.
- Fixed wage earners: Their wages remain constant while prices rise, reducing purchasing power.
Explain why Real GDP is preferred over Nominal GDP for comparing economic performance over time.
Real GDP removes the effects of inflation by using constant prices, making it a better measure for comparing economic performance across different time periods.
