Midterm Topic 2

Question 1

National Income Accounting

Answer 1

framework that is used to measure current economic activity

Question 2

Challenges and solutions to economic activities

Answer 2

1. common measures for different activities (solution: transforming economic activities into monetary values)
2. common measurement across time (solution: adjustment in the baskets of goods and services that are used to measure economic activities)
3. common measurement for different countries (solution: exchange rates)
4. mismeasurement for economic activities in home production, other unmeasurable labor (solution: estimate size of informal sector/report time in home production)

Question 3

Fundamental Identity of National Accounting

Answer 3

three alternative approaches of measuring economic activity in a national economy (product approach, income approach and expenditure approach) all provide an identical GDP value. However, each approach provides a different insight for the structure of the economy and its economic activities.

Question 4

Product approach

Answer 4

amount of output produced (also “value added”) –“supply side”

Over a long period of time, the product approach is perceived as advantageous,

Question 5

Expenditure approach

Answer 5

the amount of spending by purchases (consumers, producers, government, other countries)–“demand side”

Question 6

Income apporach

Answer 6

the incomes generated by production (labor income, capital income, taxes)

Question 7

GDP (product approach)

Answer 7

Gross Domestic Product–market value of all final goods, services, and inventories newly produced within a national economy during a fixed period of time.

Question 8

Shortcomings of market value (observed prices for goods and services)

Answer 8

It affects a country’s well-being but it is an imperfect measure of a country’s wellbeing:

1. misses non-market activities
2. misses the value of environmental quality and health (GDP only one factor of many to describe ‘wellbeing’ and ‘quality of life’)
3. does not account for resource depletion (reduction in the ‘natural’ wealth of a nation
4. government services are valued according to production needs.

Question 9

Newly produced

Answer 9

only goods and services produced in the specific period are counted. Past economic activity is ignored; only looks at what economic value has been added during the time period of interest.

Question 10

final goods and services

Answer 10

not intermediate goods (goods used up to produce final goods and not included in GDP). [Capital goods are final goods, not used up in a given period and provide input for multiple periods]

Question 11

inventories

Answer 11

unsold finished goods and include ‘goods in process’ (intermediate goods that are turned into final goods in the future) and raw materials.

Question 12

Gross National Product (GNP)

Answer 12

measures the market value of all final goods and services newly produced by a country’s national citizens and firms during a fixed period of time.

Question 13

Formula for GDP and GNP

Answer 13

GDP = GNP - NFP

Question 14

Net factor payments

Answer 14

difference between the payments to domestically owned factors located abroad (income realized abroad by nationals) and the payments to foreign factors located domestically (income realized domestically by foreigners). If NFP > 0, domestic factors earn relatively more abroad than foreign factors in the economy.

Question 15

GDP (income approach)

Answer 15

income generated within a national economy during a fixed period of time.

Question 16

GDP (expenditure approach)

Answer 16

GDP is the total spending on all final goods and services produced within a national economy during a fixed period of time.

Question 17

income expenditure equality

Answer 17

Y = C + I + G + NX [NX = X - IM]
[left hand side illustrates supply (production) of goods and services and right hand side describes the demand for goods and services]

Question 18

Consumption

Answer 18

spending by domestic households including those produced abroad. includes durable goods (cars, electronics), nondurable goods (food, clothing), and services (transportation, health).

Question 19

investment

Answer 19

spending for new capital goods plus inventory investments. includes business fixed investments of equipment, etc., residential construction, firms’ inventory holdings and raw materials.

Question 20

Government Purchases

Answer 20

expenditures by local, state, and federal governments in exchange for goods and services. transfer payments (Social security, welfare programs, etc.) are not included.

Question 21

exports

Answer 21

goods produced in the country that are purchased by foreigners

Question 22

imports

Answer 22

goods produced abroad that are purchased by nationals.

Question 23

net exports

Answer 23

difference between exports and imports (X - IM)

Question 24

net domestic product (NDP)

Answer 24

gross domestic product minus depreciation

NDP = GDP - Depreciation

Question 25

Depreciation

Answer 25

value of capital that wears out over the specific time period

Question 26

flow variable

Answer 26

measured per unit of time–take place over a given time interval (days, months, quarters, years) and cannot be measured a specific point in time (now, today, tomorrow). (include GDP, investment, savings, income)

Question 27

stock variable

Answer 27

measured at a given point in time (i.e. capital, wealth, employment, account balances).

Question 28

nominal GDP

Answer 28

calculated with current prices and current quantities of the time period

Question 29

real GDP

Answer 29

calculated with prices of a defined base year and current quantities of the time period

Question 30

price and growth illusion

Answer 30

when GDP increases, but prices are also increasing, it’s hard to tell whether economic activities are driving the growth of increased prices are. (why real GDP is used)

Question 31

exchange rates: currency market

Answer 31

disadvantage is that rates fluctuate over time because of monetary and fiscal policies as well as short term speculation in currency markets

used to classify countries into different income groups

Question 32

exchange rates: international trade

Answer 32

goods and services that are traded internationally (i.e. amount of money needed to import a car from Europe in comparison with two currencies). Challenge: emphasizes goods and services that are traded internationally and underestimate goods not traded internationally.

Question 33

exchange rates: Purchasing Power Parity

Answer 33

using a basket of goods and services that includes relevant goods and services. (define a basket, estimate expenditures for each country of the basket, calculate exchange rate: PPP(AB) = PA / PB

provides more stable assessment of economic activities and reduces bias of non-traded goods.

used to compare the standard of living in different countries.

Question 34

Why log?

Answer 34

GDP as an exponential path. Log of GDP can approximate exponential growth path with changing slope with a changing slope as a linear growth path with a constant slope. (Logs linearize GDP data)

GDP: axis shows absolute GDP value, slope shows absolute change in GDP.
Log of GDP: axis shows base value for GDP, slope shows relative change in GDP (as percent value)

Another advantage: it simplifies the illustration of GDP for countries that differ in absolute values. easier to compare countries with high and small absolute values.

Question 35

growth rates

Answer 35

used to evaluate changes in economic activity over time.