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ECO1017 > Measuring a nation's income > Flashcards

Measuring a nation's income Flashcards

1
Q

What are 4 ways to measure an economy’s output?

A

Circular flow of income
Gross Domestic Product (GDP)
Real vs Nominal production
GDP and well being

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2
Q

What are 4 ways of measuring the cost of living?

A

Consumer Price Index (CPI)
Measuring inflation
Correcting for inflation
Real vs Nominal interest rates

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3
Q

Why must income equal expenditure for an economy as a whole?

A

Every transaction has a buyer and a seller

Every $ of spending by some buyer is a $ of income for some seller

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4
Q

What would cause a large impact on the economy?

A

If people decided to reduce their spending

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5
Q

What does a circular flow diagram represent?

A

How money, services and goods move through the economy.

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6
Q

What is GDP a measurement of?

A

It is the measurement of the income and expenditures of an economy

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7
Q

What is GDP?

A

The total market value of all goods and services produced within a country in a given period of time

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8
Q

For what goods does the GDP record value?

A

GDP records the value of finished goods only, not intermediate goods, this is because the value is only counted once

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9
Q

For what type of area or region is GDP measured?

A

GDP is measured for countries

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10
Q

What can the time period for measuring GDP be?

A

A quarter or a year

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11
Q

What does the market decide?

A

How much people are willing to pay

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12
Q

What type of goods don’t reach the consumer?

A

Intermediate goods

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13
Q

What does GDP include?

A

All items produced in the economy and sold legally in markets

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14
Q

What does GDP exclude?

A

Most items that are produced and consumed at home or that never enter the market place.
It excluded goods that are produced and sold illicitly such as illegal drugs

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15
Q

Why can GDP vary?

A

Because it concerns legal sales

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16
Q

What is the GDP equation?

A

Y = C + I + G + NX

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17
Q

What is Y in the GDP equation?

A

Y is GDP

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18
Q

What is C in the GDP equation?

A

C is consumption

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19
Q

What is I in the GDP equation?

A

I is investment

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20
Q

What is G in the GDP equation?

A

Government purchases

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21
Q

What is NX in the GDP equation?

A

NX is net exports

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22
Q

What is consumption?

A

This is spending by households on goods and services, with the exception of purchasing new housing.
It suggests something that is used immediately.

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23
Q

What is investment?

A

The spending on capital equipment, inventories and structures, including new housing

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24
Q

What is investment used for?

A

The future

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25
Q

What is consumption used for?

A

It is used immediately

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26
Q

What is meant by government purchases?

A

The spending on goods and services by local and central governments

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27
Q

What do government purchases not include?

A

Transfer payments

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28
Q

Why do government purchases not include transfer payments?

A

Because they are not made in exchange for currently produced goods or services

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29
Q

What are transfer payments?

A

Things like benefits and pensions

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30
Q

What are net exports?

A

Exports minus imports

31
Q

Who finances unemployment benefits?

A

People paying income tax

32
Q

What does nominal GDP value?

A

Nominal GDP values the production of goods and services at current prices

33
Q

What does real GDP value?

A

Real GDP values the production of goods and services at constant prices

34
Q

Why does nominal GDP have to be adjusted?

A

In order to give an accurate view of the economy

35
Q

How can nominal GDP be adjusted?

A

By using a GDP deflator

36
Q

What is a GDP deflator?

A

A measure of the price level calculated as the ratio of nominal GDP to real GDP x 100

37
Q

What is the real GDP equation?

A

Real GDP = nominal GDP / GDP deflator

38
Q

What is the GDP deflator equation?

A

GDP deflator = (nominal GDP / real GDP) x 100

39
Q

What information does the GDP deflator provide?

A

It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in quantities produced

40
Q

What does the GDP deflator remove distortion from?

A

It removes distortion from inflation

41
Q

What 3 things that contribute to well-being are not included in GDP?

A

The value of leisure
The value of a clean environment
The value of most activities that take place outside of markets

42
Q

Give an example of two activities that take place outside of markets that aren’t included in GDP

A

The value of the time parents spend with their children

The value of volunteer work

43
Q

What is GDP the best single measure of?

A

GDP is the best single measure of the economic well-being of a society

44
Q

What information does GDP per person provide?

A

It gives the mean income and expenditure of people in the economy

45
Q

What does a high GDP indicate?

A

A high GDP indicates a higher standard of living

46
Q

Explain the UK’s GDP from 2009

A

% of consumption is increasing but investment is decreasing
Imports are more than exports- worries with trade
The UK has had a negative net export value for a very long time

47
Q

What is CPI a measure of?

A

The overall cost of the goods and services bought by a typical consumer

48
Q

How often does the Office of National Statistics report the CPI?

A

Each month

49
Q

What is CPI used to monitor?

A

It is used to monitor changes in the cost of living over time

50
Q

What does the typical family have to do when CPI rises?

A

The typical family has to spend more money to maintain the same standard of living

51
Q

What does inflation describe?

A

It describes a situation in which the economy’s overall price level is rising

52
Q

What is the inflation rate?

A

It is the percentage change in the price index from the previous period

53
Q

What is required when calculating CPI?

A

A base year

54
Q

What does a CPI base year do?

A

Act as a bench mark against which other years are compared

55
Q

How can you compute the CPI?

A

Divide the price of the basket in one year by the price in the base year and multiply by 100

56
Q

What is the basket used to calculate CPI?

A

It is the cost of living from a representative person

57
Q

What is an issue with the CPI basket?

A

Not all people consume the same things, for example not everyone smokes

58
Q

How do you calculate the inflation rate?

A

((CPI in Year 2- CPI in Year 1)/ CPI in Year 1 ) x 100

59
Q

What does lower inflation not imply?

A

Lower inflation does not imply that prices are lower

60
Q

What does lower inflation imply?

A

It implies that the rate of price increase is lower

61
Q

What are the GDP deflator and CPI used to gauge?

A

How quickly prices are rising

62
Q

What two differences can cause the GDP deflator and CPI to diverge?

A

The GDP deflator reflects the prices of all goods and services produced domestically
The CPI reflects the prices of all goods and services bought by consumers

63
Q

What are used to correct for the effects inflation when comparing money figures from different times?

A

Price indexes

64
Q

Give an example of something that is indexed for inflation

A

Pensions

65
Q

What is meant by “indexed for inflation”?

A

A money amount has automatically been corrected for inflation by law or contract

66
Q

What does interest represent?

A

Interest represents a payment in the future for a transfer of money in the past

67
Q

Which type of interest rate is usually imported?

A

The nominal interest rate is usually reported

68
Q

What is the nominal interest rate not corrected for when it is reported?

A

It is not corrected for inflation

69
Q

Which interest rate does the bank pay?

A

It pays the nominal interest rate

70
Q

What is the real interest rate a version of?

A

It is the nominal interest rate that is corrected for the effects of inflation

71
Q

How can you find the real interest rate if you have the nominal interest rate and the inflation?

A

nominal interest rate - inflation

72
Q

When is the best time to borrow?

A

When inflation is high

73
Q

Why is it a good idea to borrow when inflation is high?

A

If the interest rate is frozen but inflation is high then the loan will be easier to pay back as you will earn more for the same amount of effort. When inflation is higher than interest rates, it will reduce the value of money.

ECO1017 (16 decks)

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