Part 1 - Measurement

Question 1

Ways to measure GDP

Answer 1

1 Product approach
2 Expenditure approach
3 Income approach

Question 2

Product Approach

Answer 2

Value-added approach:
- Add value of all goods and services produced in the
economy.
- Subtract the value of all intermediate goods to avoid
double-counting.

Question 3

Expenditure Approach

Answer 3

Total expenditure: C + I + G + NX.

Question 4

Income Approach

Answer 4

• Add up all income received by economic agents contributing to the production.
• Note that we only consider taxes paid by producers.

Question 5

What does GDP leave out?

Answer 5

• GDP does not take into account how income is distributed.
• GDP leaves out all non-market activity, e.g., work in the home.
• Economic activity in the underground economy cannot be measured directly.

Question 6

Price Index:

Answer 6

Weighted average of a set of observed prices that gives a measure of the price level.

Question 7

Price indices

Answer 7

allow us to measure the inflation rate (the rate of change in the price level).

Question 8

Implicit GDP Price Deflator

Answer 8

Nominal GDP / Real GDP * 100

Question 9

Problems in Measuring Real GDP and the

Price Level

Answer 9

• Relative prices of goods change over time.

- Quality of goods and services changes over time

Question 10

Private disposable income:

Answer 10

Y d = Y + NFP + TR + INT - T

Question 11

Gross National Product (GNP):

Answer 11

Output produced by domestic

factors of production, whether or not the production takes place inside the country’s borders.

Question 12

Unemployment Rate

Answer 12

• can be used as an indirect measure of economic welfare.

- helps determine the level of labor market tightness.