measuring the economy Flashcards
What does GDP stand for and what does it measure?
Gross Domestic Product; it measures the total market value of all final goods and services produced in an economy over a given period.
How do we compare living standards between countries?
By using GDP per capita, which is total GDP divided by the population.
Why are intermediate goods excluded from GDP?
To avoid double counting, since their value is already included in the final goods.
What is the easiest way to compare the value of different goods and services?
By using their market prices.
What is disposable income?
The income (wages, profits, rents, interest, and transfers received) minus the transfers made to others — it represents the maximum amount someone can spend without going into debt.
What important aspects of wellbeing are not included in disposable income?
Social and physical environment, free time, publicly provided goods (like healthcare), and household production (like childcare).
What is the difference between GDP and disposable income in terms of government goods?
GDP includes the value of government-provided goods and services; disposable income does not.
Why can average income fail to reflect a population’s wellbeing?
Because income distribution matters — people compare themselves to others, and relative income affects perceived wellbeing.
What is one way GDP can be better than disposable income at measuring living standards?
GDP includes public services that contribute to wellbeing, which disposable income leaves out.
What are some limitations of using GDP per capita as a measure of wellbeing?
It does not capture inequality, unpaid work, environmental quality, or non-market services.
What are the core features of capitalism that contributed to economic growth?
Private property, markets, and firms.
How did advances in technology and specialisation affect productivity?
They significantly increased productivity, fueling economic growth.
What are two growing concerns linked to the capitalist revolution?
Environmental degradation and global inequality.
What are the three methods for estimating GDP?
Spending approach, production approach, and income approach.
What does the spending approach to GDP measure?
The total spending by households, firms, the government, and foreign buyers on domestic products.
What does the production approach to GDP measure?
The total value added by each industry, subtracting the value of intermediate inputs to avoid double counting.
What does the income approach to GDP measure?
The total income received: wages, profits, self-employment income, and taxes.
In an economy that produces only shirts, what is the GDP if a shirt sells for $100 to a consumer?
$100 — the value of the final sale to the consumer.
How do imports and exports affect GDP?
Exports are included (domestically produced), imports are excluded (produced abroad).
What does the circular flow diagram show about the government’s role?
Households pay taxes → Government uses taxes to produce public goods → Households consume these goods.
What’s the difference between durable and non-durable goods?
Durable goods last 3+ years (e.g. cars), non-durable goods are used up quickly (e.g. food).
Are government transfers (like benefits and pensions) included in “G”?
No — they’re counted in consumption when spent to avoid double-counting.
How are net exports (X – M) calculated, and what do they represent?
Exports minus imports; represents the trade balance.
When is the trade balance a deficit?
When imports exceed exports (X – M is negative).
What is the formula for calculating GDP using the expenditure approach?
GDP (Y) = C + I + G + (X – M)
What is inflation?
A general increase in the price level in the economy, usually measured over a year.
What is deflation?
A general decrease in the price level.
Is inflation typically higher in richer or poorer countries?
poorer
What does the Consumer Price Index (CPI) measure?
The average price level of goods and services purchased by a typical household.
How is the CPI basket constructed?
It includes goods/services weighted by the share of household spending they represent. it includes imports and excludes exports. inflation is the percentage change in the CPI
What is the GDP deflator?
A price index that measures the price changes of all domestically produced final goods and services. it accounts for exports not imports
How is the GDP deflator calculated?
GDP Deflator = Nominal GDP / Real GDP
What does zero inflation mean in economic terms?
Price level stays constant, like a car that’s not moving.
What is falling inflation, and what is it called?
Disinflation — when inflation slows down, like a car decelerating.
CPI in year t formula
CPIt = (total spending on the basket in period t) / (total spending on the basket in the base period) x 100
What are the three conditions someone must meet to be classified as unemployed?
Not in paid/self-employment
Available to work
Actively seeking work
Who is included in the working-age population?
Everyone except children and people over 64.
What two groups make up the working-age population?
The labour force (employed + unemployed)
The inactive (not working or seeking work)
What is the participation rate?
The proportion of the working-age population that is in the labour force.
What is the formula for the participation rate?
ParticipationRate= (LabourForce / Working-AgePopulation) x 100
What is the unemployment rate?
The proportion of the labour force that is unemployed.
What is the formula for the unemployment rate?
UnemploymentRate=( Unemployed / LabourForce ) × 100
What is the employment rate?
The proportion of the working-age population that is employed (in paid work or self-employed).
What is the formula for the employment rate?
EmploymentRate=( Employed / Working-AgePopulation) × 100
Labour force formula
Labour force = number of employed + number of unemployed
Can two countries have the same unemployment rate but different employment rates? Why?
Yes — if one has a higher participation rate, its employment rate will also likely be higher.
what are factors of production with factor income
land - rent
labour - wages
capital - interest
entrepreneur - profit
Who calculates GDP in the US and the UK?
In the US, it’s the Federal Reserve; in the UK, it’s the ONS (Office for National Statistics)
What is nominal GDP?
GDP measured at current market prices (not adjusted for inflation).
What is real GDP?
An inflation-adjusted measure that reflects the value of all goods and services produced in a given year.
What is the identity relationship between national output, income, and expenditure?
National output = National income = National expenditure.
formula for disposable income per capita
disposable income per capita = (national income - income taxes + transfers) / population
formula for real GDP per capita
real GDP per capita = real GDP / population
What is a government transfer?
Government spending where no goods or services are received in return, such as pensions or benefits.
How do transfers function in economic terms?
As a negative tax—they redistribute income but are not included in government spending (G) in GDP calculations.
