Measuring GDP and economic growth

Question 1

Macroeconomics

Answer 1

Looks at the big picture

Question 2

Microeconomics

Answer 2

smaller scale - e.g. Leeds University

Question 3

GDP

Answer 3

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

Question 4

Market value

Answer 4

Goods and services are valued at their market prices.

Question 5

Final goods and services

Answer 5

An item bought by its final user during a specified time period.

Question 6

Intermediate goods

Answer 6

An item that is produced by one firm, bought by another firm, and used as a component of a final good/service.

Question 7

Value of production

Answer 7

The sum of total expenditure on final goods and total income.

Question 8

Equality of income and output

Answer 8

Shows the direct link between productivity and living standards.

Question 9

The circular flow diagram illustrates…

Answer 9

the equality of income, expenditure, and the value of production.
It shows transactions among households, firms, governments, and the rest of the world.

Question 10

Factor markets

Answer 10

The markets where households sell and firms buy the services of labour, capital, and land.

Question 11

In the circular flow diagram, blue flow ‘Y’ shows…

Answer 11

total income paid by firms to households.

Question 12

Goods market

Answer 12

Where firms sell and households buy consumer goods.

Question 13

Consumption expenditure

Answer 13

the total payment for consumer goods and services, shown by the red flow ‘C’ on the circular flow diagram.

Question 14

The red flow labelled ‘I’ on the circular flow diagram represents…

Answer 14

Investment: the purchase of new plant, equipment, and buildings, and the additions to inventories.

Question 15

Government expenditure

Answer 15

Governments buy goods and services from firms.

Shown as the red flow ‘G’ on the diagram.

Question 16

Aggregate expenditure

Answer 16

the sum of expenditures on consumption, investment, government expenses and net exports.

Question 17

Depreciation

Answer 17

the decrease in the value of a firm’s capital that results from wear and tear and obsolescence.

Question 18

Gross investment

Answer 18

The total amount spent on purchases of new capital and on replacing depreciated capital.
It is one of the expenditures included in the expenditure approach to measuring GDP - so aggregate expenditure is a gross measure.

Question 19

Net investment

Answer 19

the increase in the value of a firm’s capital.

Net investment = gross investment - depreciation.

Question 20

Gross profit

Answer 20

A firm’s profit before subtracting depreciation.

One of the incomes included in the income approach to measuring GDP - aggregate income is a gross measure.

Question 21

What are the two approaches used by the ONS to measure GDP?

Answer 21

The expenditure approach

The income approach

Question 22

Expenditure approach

Answer 22

measures GDP as the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports.

Question 23

Income approach

Answer 23

measures GDP by summing the incomes that firms pay households for the factors of production that they have.

Question 24

The UK National Accounts divide incomes into 3 categories…

Answer 24

1. compensation of employees
2. gross operating surplus
3. mixed economies

Question 25

Real GDP

Answer 25

The value of final goods and services produced in a given year when valued at the prices of a reference base year.
(current base year is 2006)

Question 26

Nominal GDP

Answer 26

The value of goods and services produced during a given year and valued at the prices that prevailed in that same year.
(just a more precise name for GDP)

Question 27

Why do economists use estimates of real GDP?

Answer 27

To compare the standard of living over time.

To compare the standard of living across countries.

Question 28

What are the two features of our expanding living standards?

Answer 28

The growth of potential GDP per person.

Fluctuations of real GDP around potential GDP.

Question 29

Potential GDP

Answer 29

The value of production when all the economy’s labour, capital, land, and entrepreneurial ability are fully employed.
Real GDP fluctuates around potential GDP.

Question 30

Lucas wedge

Answer 30

The Lucas wedge is the pound value of the accumulated gap between what real GDP per person would have been if the 1960s growth rate had persisted, and what real GDP turned out to be.
Economic growth and the Lucas wedge help determine the long-run living standard of your life.

Question 31

Business cycle

Answer 31

A periodic but irregular up-and-down movement of total production and other measures of economic activity.
Every cycle has two phases: expansion, recession.
And two turning points: peak, trough.

Question 32

Expansion

Answer 32

A period during which real GDP increases - from peak to trough.

Question 33

Recession

Answer 33

A period during which real GDP decreases - its growth rate is negative for at least two successive quarters.

Question 34

Two problems with using GDP to compare living standards across countries:

Answer 34

1. the real GDP of one country must be converted into the same currency units as real GDP of the other country.
2. the goods and services in both countries must be valued at the same prices.

Question 35

PPP

Answer 35

Purchasing Power Parity prices

Question 36

Which other factors can influence living standards besides GDP?

Answer 36

Household production; underground economic activity; health and life expectancy; leisure time; environmental quality; political freedom and social injustice.

Question 37

Omissions from GDP

Answer 37

Illegal activities and activities we carry out for ourselves such as mowing our lawn.
However, if we pay someone else to mow our lawn, this will be included in GDP.