Macro Intro

Question 1

Explain which transactions in the economy are included in GDP?

Answer 1

1- Consumption: good and services purchased by households
2- Investments: Business fixed investments, Residental fixed income, Changes in business inventory
3- Government spending: goods and services purchased by the government
4- Net exports: net expenditure from abroad on goods and services
Y = C + I + G + NX

Question 2

Is GDP a good measure of welfare?

Answer 2

No, because GDP does not include, work-life balance, illegal economies, unpaid work etc. Therefore a high GDP does not equal high/good welfare

Question 3

Distinguish between real and nominal GDP ?

Answer 3

Nominal GDP is calculated using current prices.
Real GDP is adjusted for inflation and changes in pricing
Real GDP provides a better basis for judging long-term national economic performance

Real GDP = Nominal GDP/(Nominal GDP/Real GDP)*100

Question 4

What is the difference between GNP and GDP ?

Answer 4

GDP represent total income produced domestically
GNP is the total income earned by nationals
GNP = GDP + Net factor payment from abroad

Question 5

What is meant by private disposable income(PDI)?

Answer 5

It is the income available to households after taxes and transfers
PDI = Y-T

Question 6

Show that the total saving in an economy will always equal investment + net exports

Answer 6

Savings = PDI - Consumption
S=Y-T-C
S= I+G+X-Z-T
S+(T-G)=(X-Z)+I

Private saving +Government saving = Net exports+Investment = Total Saving

Question 7

What happens to GDP when a housewife becomes self-employed as her own day care centre?

Answer 7

GDP will increase as the housewife changes from an informal to formal work. This will then be counted as GDP

Question 8

bought my house for £100 000. I have just sold it for £200 000 and the estate agent
received a 10% commission from the buyer. What is the effect on GDP?

Answer 8

£20,000
Because there is no production (as the house is not being built as the production took place in a previous year and was counter then) The value of the house will not be added to GDP. The commission from the estate agent will be added

Question 9

What is Consumer Price Index (CPI)

Answer 9

• It is the price of a fixed basket of goods and services
• It takes into account goods and services bought by a
  typical consumer
• Compares price of good in current year with respect
  to base year
  CPI = (value of basket of current year / value of basket in base year) *100