Lecture 2 - Measuring Macro Data

Question 1

What are the 3 approaches to viewing/measuring GDP?

Answer 1

• production approach
• expenditure approach
• income approach

Question 2

What is meant by national accounting?

Answer 2

a process that looks at the state of an economy at a given time

Question 3

Give the production definition of GDP

Answer 3

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

Question 4

Give the expenditure definition of GDP

Answer 4

the total expenditure on domestically-produced final goods and services over a given period

Question 5

Give the income definition of GDP

Answer 5

the total income earned by domestically-located factors of production over a given period

Question 6

What is a firm’s value added?

Answer 6

the value of its output minus the value of the intermediate goods the firm used to produce that output

Question 7

Why do we not include intermediate goods when calculating GDP?

Answer 7

as the value of the final goods already includes the value of the intermediate goods

Question 8

What formula is used for calculating GDP?

Answer 8

Y = C + I + G + NX

Question 9

What is meant by consumption?

Answer 9

the value of all goods and services bought by households

Question 10

What is the difference between durable goods and non-durable goods?

Answer 10

• durable goods last a long time (e.g. cars, home appliances)
• non-durable goods last a short time (e.g. food, clothing)

Question 11

What are the 2 definitions for investment?

Answer 11

• spending on (the factor of production) capital
• spending on goods bought for future use

Question 12

What are the 3 different types of investment?

Answer 12

• business fixed investment
• residential fixed investment
• inventory investment

Question 13

What is meant by ‘business fixed investment’?

Answer 13

spending on plant and equipment that firms will use to produce other goods and services

Question 14

What is meant by ‘residential fixed investment’?

Answer 14

spending on housing units by consumers and landlords

Question 15

What is meant by ‘inventory investment’?

Answer 15

the change in the value of all the firms’ inventories

Question 16

What is the equation for ‘gross fixed investment’ or ‘gross fixed capital formation’?

Answer 16

gross fixed investment = business + residential fixed investment

Question 17

What is the equation for ‘Gross Capital Formation’?

Answer 17

• gross capital formation = GFCF + inventory changes
• (= Investment)

Question 18

What does Government Spending include?

Answer 18

includes all government spending on goods and services

Question 19

Why doesn’t government spending include transfer payments (e.g. unemployment insurance payments)?

Answer 19

• because transfer payments do not represent spending on goods and services
• it is instead a ‘transfer’ from one place to another

Question 20

What is the definition and equation for NX (net exports)?

Answer 20

• net exports is the value of total exports minus the value of total imports
• NX = EX - IM

Question 21

What is a stock, and what is a flow?

Answer 21

• a stock is a quantity measured at a point in time
• a flow is a quantity measured per unit time

Question 22

In the US and the UK, what is the ratio of labour income to total income? (share of GDP to labour)

Answer 22

approximately 2/3

Question 23

List 3 important components that GDP does not include

Answer 23

• home production (where parents raise and care for their children)
• goods or services not transacted in markets
• used good transactions
• housing services
• underground economy

Question 24

List 3 issues for measuring GDP moving forward?

Answer 24

• gig economy
• digital economy
• intangible assets

Question 25

What is the equation linking nominal GDP, real GDP, and the price level?

Answer 25

nominal GDP = price level x real GDP

Question 26

What is the equation for the GDP deflator?

Answer 26

GDP deflator = Nominal GDP / Real GDP

Question 27

What does a GDP deflator show?

Answer 27

• it shows how much a change in GDP relies on changes in the price level
• can be viewed as a measure of general inflation in the domestic economy

Question 28

Define inflation rate

Answer 28

the rate at which prices change over time

Question 29

Give 4 different measures of inflation

Answer 29

• GDP deflator
• Consumer Price Index (CPI)
• Harmonised Index of Consumer Prices (HICP)
• Retail Price Index (RPI)

Question 30

How is CPI measured?

Answer 30

measures the prices of a typical basket of goods

Question 31

What is the Harmonised Index of Consumer Prices (HICP)?

Answer 31

a measure of the overall level of prices for countries in the EU

Question 32

How is RPI measured?

Answer 32

a CPI type of inflation measure which includes housing costs (e.g. mortgage prices, etc) among other things

Question 33

What are the 3 main differences between CPI and the GDP deflator?

Answer 33

• prices of capital goods
• prices of imported consumer goods
• the basket of goods

Question 34

How does CPI and the GDP deflator differ in relation to the prices of capital goods?

Answer 34

prices of capital goods are included in the GDP deflator (if produced domestically), but it is excluded from CPI

Question 35

How does CPI and the GDP deflator differ in relation to the price of imported consumer goods?

Answer 35

included in CPI, excluded from the GDP deflator

Question 36

How does CPI and the GDP deflator differ in relation to the basket of goods?

Answer 36

• CPI: fixed
• GDP deflator: changes every year

Question 37

What are the 2 steps to make comparisons of GDP across countries?

Answer 37

• GDP must be expressed in a common currency by first adjusting it to the exchange rate
• this value of nominal GDP must be multiplied by the ratio of prices in the countries
• (the final number adjusts for differences in prices across countries)