Measuring a nation's income Flashcards
What are 4 ways to measure an economy’s output?
Circular flow of income
Gross Domestic Product (GDP)
Real vs Nominal production
GDP and well being
What are 4 ways of measuring the cost of living?
Consumer Price Index (CPI)
Measuring inflation
Correcting for inflation
Real vs Nominal interest rates
Why must income equal expenditure for an economy as a whole?
Every transaction has a buyer and a seller
Every $ of spending by some buyer is a $ of income for some seller
What would cause a large impact on the economy?
If people decided to reduce their spending
What does a circular flow diagram represent?
How money, services and goods move through the economy.
What is GDP a measurement of?
It is the measurement of the income and expenditures of an economy
What is GDP?
The total market value of all goods and services produced within a country in a given period of time
For what goods does the GDP record value?
GDP records the value of finished goods only, not intermediate goods, this is because the value is only counted once
For what type of area or region is GDP measured?
GDP is measured for countries
What can the time period for measuring GDP be?
A quarter or a year
What does the market decide?
How much people are willing to pay
What type of goods don’t reach the consumer?
Intermediate goods
What does GDP include?
All items produced in the economy and sold legally in markets
What does GDP exclude?
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
Why can GDP vary?
Because it concerns legal sales
What is the GDP equation?
Y = C + I + G + NX
What is Y in the GDP equation?
Y is GDP
What is C in the GDP equation?
C is consumption
What is I in the GDP equation?
I is investment
What is G in the GDP equation?
Government purchases
What is NX in the GDP equation?
NX is net exports
What is consumption?
This is spending by households on goods and services, with the exception of purchasing new housing.
It suggests something that is used immediately.
What is investment?
The spending on capital equipment, inventories and structures, including new housing
What is investment used for?
The future
What is consumption used for?
It is used immediately
What is meant by government purchases?
The spending on goods and services by local and central governments
What do government purchases not include?
Transfer payments
Why do government purchases not include transfer payments?
Because they are not made in exchange for currently produced goods or services
What are transfer payments?
Things like benefits and pensions
What are net exports?
Exports minus imports
Who finances unemployment benefits?
People paying income tax
What does nominal GDP value?
Nominal GDP values the production of goods and services at current prices
What does real GDP value?
Real GDP values the production of goods and services at constant prices
Why does nominal GDP have to be adjusted?
In order to give an accurate view of the economy
How can nominal GDP be adjusted?
By using a GDP deflator
What is a GDP deflator?
A measure of the price level calculated as the ratio of nominal GDP to real GDP x 100
What is the real GDP equation?
Real GDP = nominal GDP / GDP deflator
What is the GDP deflator equation?
GDP deflator = (nominal GDP / real GDP) x 100
What information does the GDP deflator provide?
It tells us the rise in nominal GDP that is attributable to a rise in prices rather than a rise in quantities produced
What does the GDP deflator remove distortion from?
It removes distortion from inflation
What 3 things that contribute to well-being are not included in GDP?
The value of leisure
The value of a clean environment
The value of most activities that take place outside of markets
Give an example of two activities that take place outside of markets that aren’t included in GDP
The value of the time parents spend with their children
The value of volunteer work
What is GDP the best single measure of?
GDP is the best single measure of the economic well-being of a society
What information does GDP per person provide?
It gives the mean income and expenditure of people in the economy
What does a high GDP indicate?
A high GDP indicates a higher standard of living
Explain the UK’s GDP from 2009
% 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
What is CPI a measure of?
The overall cost of the goods and services bought by a typical consumer
How often does the Office of National Statistics report the CPI?
Each month
What is CPI used to monitor?
It is used to monitor changes in the cost of living over time
What does the typical family have to do when CPI rises?
The typical family has to spend more money to maintain the same standard of living
What does inflation describe?
It describes a situation in which the economy’s overall price level is rising
What is the inflation rate?
It is the percentage change in the price index from the previous period
What is required when calculating CPI?
A base year
What does a CPI base year do?
Act as a bench mark against which other years are compared
How can you compute the CPI?
Divide the price of the basket in one year by the price in the base year and multiply by 100
What is the basket used to calculate CPI?
It is the cost of living from a representative person
What is an issue with the CPI basket?
Not all people consume the same things, for example not everyone smokes
How do you calculate the inflation rate?
((CPI in Year 2- CPI in Year 1)/ CPI in Year 1 ) x 100
What does lower inflation not imply?
Lower inflation does not imply that prices are lower
What does lower inflation imply?
It implies that the rate of price increase is lower
What are the GDP deflator and CPI used to gauge?
How quickly prices are rising
What two differences can cause the GDP deflator and CPI to diverge?
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
What are used to correct for the effects inflation when comparing money figures from different times?
Price indexes
Give an example of something that is indexed for inflation
Pensions
What is meant by “indexed for inflation”?
A money amount has automatically been corrected for inflation by law or contract
What does interest represent?
Interest represents a payment in the future for a transfer of money in the past
Which type of interest rate is usually imported?
The nominal interest rate is usually reported
What is the nominal interest rate not corrected for when it is reported?
It is not corrected for inflation
Which interest rate does the bank pay?
It pays the nominal interest rate
What is the real interest rate a version of?
It is the nominal interest rate that is corrected for the effects of inflation
How can you find the real interest rate if you have the nominal interest rate and the inflation?
nominal interest rate - inflation
When is the best time to borrow?
When inflation is high
Why is it a good idea to borrow when inflation is high?
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.
