STUDY UNIT 1

Question 1

what is the measure of aggregate output?

Answer 1

gross domestic product/GDP

Question 2

define GDP

Answer 2

the total value of goods and services produced within the boundaries of a country during a particular period (one year).

Question 3

why is GDP a gross measurement?

Answer 3

it includes the total amount of goods and services produced

Question 4

define the “inside the borders” part of the definition of GDP

Answer 4

GDP measures the goods and services produced inside the borders by both citizens and foreigners.

Question 5

explain the “value added” part of the definition of GDP

Answer 5

The term “value added” is the value of its production minus the value of the intermediate goods used in production.

Question 6

what types of goods are only included in GDP?

Answer 6

final foods and services

Question 7

what are intermediate goods?

Answer 7

goods that are used as inputs in producing other goods before they are sold and are excluded from GDP

Question 8

What is nominal GDP?

Answer 8

the sum of the quantities of final goods and services produced in current prices

Question 9

what are the 2 reasons in which nominal GDP can increase?

Answer 9

1. when the production of most goods and services increases over time
2. the prices of most goods and services increase over time

Question 10

example of calculating nominal GDP (don’t memorize, just understand)

Answer 10

nominal GDP of cars goes up from $200 000 in 2004 to $2880 000 in 2005 giving a 44% increase

Question 11

what is real GDP?

Answer 11

the sum of the quantities of final goods and services in constant prices

Question 12

how do you calculate real GDP?

Answer 12

use the price of a good in a given year and then use it to multiply the quantity of goods and services in each year

Question 13

example of calculating real GDP (don’t memorize, just understand)

Answer 13

real GDP in 2004 (using 2005 price): 10 cars x $24 000 (2005 price)= $240 000

real GDP in 2005: 12 cars x $24 000 (2005 price)= $288 000 ( same as nominal GDP)

Question 14

what is GDP per capita?

Answer 14

the ratio of real GDP to the population of the country

Question 15

what is GDP per capita used for?

Answer 15

it is used to determine the average standard of living of the country

Question 16

how do you calculate GDP per capita?

Answer 16

total GDP/population

Question 17

what is GDP growth?

Answer 17

a tool economists use to asses the performance of the economy from year to year

Question 18

what do you call a period of positive economic growth?

Answer 18

expansion

Question 19

what do you call a period of negative economic growth?

Answer 19

recession

Question 20

what is employment?

Answer 20

Employment is the number of people who have a job.

Question 21

what is unemployment?

Answer 21

Unemployment is the number of people who do not have a job but are looking for one

Question 22

what is the labour force?

Answer 22

The labor force is the sum of employment and unemployment:

L (labor force) = N (employment) + U (unemployment)

Question 23

what is the unemployment rate?

Answer 23

The unemployment rate is the ratio of the number of people who are unemployed to the number of people in the labor force:

u (unemployment rate) = U (unemployed)/L (labour force)

Question 24

what is inflation?

Answer 24

Inflation is a sustained rise in the general level of prices—the price level

Question 25

what is the inflation rate?

Answer 25

The inflation rate is the rate at which the price level increases.

Question 26

what are the 2 measures of price levels macroeconomists look at?

Answer 26

Macroeconomists typically look at two measures of the price level, at two price indexes: the GDP deflator and the Consumer Price Index.

Question 27

what is the GDP deflator?

Answer 27

The GDP deflator gives the average price of output—the final goods produced in the economy

Question 28

what is CPI?

Answer 28

To measure the average price of consumption, or, equivalently, the cost of living, macroeconomists look at another index, the Consumer Price Index, or CPI.

Question 29

how do you calculate the GDP deflator?

Answer 29

The GDP deflator in year t, Pt, is defined as the ratio of nominal GDP to real GDP in year t: Pt = Nominal GDPt/ Real GDPt = $Yt/Yt

Question 30

what is the advantage of defining the GDP deflator?

Answer 30

One advantage to defining the price level as the GDP deflator is that it implies a simple relation among nominal GDP, real GDP, and the GDP deflator

Question 31

how do you calculate nominal GDP using real GDP and the GDP deflator?

Answer 31

Nominal GDP is equal to the GDP deflator times real GDP. Or, putting it in terms of rates of change: The rate of growth of nominal GDP is equal to the rate of inflation plus the rate of growth of real GDP

Question 32

how to calculate CPI?

Answer 32

add all the past and current prices together then divide them by total past prices and multiply them by 100

Question 33

what is the strict definition of unemployment?

Answer 33

The strict definition of unemployment used by Stats SA regards unemployed people as being 15 years and older, who, * are not in paid employment or self-employed, * were available for paid employment or self-employment during the seven days preceding the interview, and, * took specific steps during the four weeks preceding the interview to find paid employment or self-employment.

Question 34

what is an expanded definition of unemployment?

Answer 34

Expanded – omits the requirement that a person actively seeks employment. The argument is that many people are discouraged from actively seeking work owing to the small probability of finding a job.

Question 35

what is microeconomics?

Answer 35

Microeconomics: deals with the behaviour and decisions of individual consumers, households, firms and focuses on demand and supply of individual goods and services and the determination of their prices.

Question 36

what is macroeconomics?

Answer 36

Macroeconomics: deals with the economy as a whole. It determines and explores the relationship between aggregate concepts such as Y (income, production), general price level, interest rate levels, economic growth, unemployment and exchange rates

Question 37

what is a balance of payment?

Answer 37

a systematic statistical record of all economic transactions between the residents in the reporting country and the rest of the world

Question 38

what are the 4 accounts of balance of payments?

Answer 38

The balance of payments consists of four basic accounts: * the current account * the capital transfer account * the financial account * unrecorded transactions

Question 39

what are the 2 major accounts?

Answer 39

The two major accounts are the current and financial account

Question 40

explain the current and financial accounts

Answer 40

The current account records a country’s involvement in international trade (exports and imports), while the financial account records the country’s involvement in international capital flows

Question 41

what happens of there is a surplus or deficit of the current account?

Answer 41

If there is a surplus on the current account, this indicates that the value of the country’s exports exceeded the value of its imports during the period under review. If there is a deficit, then imports were greater than exports.

Question 42

what happens of there is a surplus or deficit of the financial account?

Answer 42

A surplus on the financial account indicates that more funds flowed into than out of the country during the period concerned and a net inflow of foreign capital occurred. A deficit on the financial account indicates that the outflow of capital exceeded the inflow of capital and a net outflow of capital occurred.

Question 43

what is fiscal policy?

Answer 43

the government's policy in regard to the nature, level and composition of government spending, taxation and borrowing.

Question 44

what is the instrument of fiscal policy?

Answer 44

budget

Question 45

what are the main variables for fiscal policy?

Answer 45

government spending and taxation

Question 46

what are the differences between contractionary and expansionary fiscal policy?

Answer 46

an expansionary fiscal policy deals with government spending increasing and/or decreased taxation. contractionary fiscal policy deals with government spending decreasing and/or taxation increasing

Question 47

what is monetary policy?

Answer 47

the SARB's policy regarding the stance on the repo rate and money supply

Question 48

what are the instruments of the monetary policy?

Answer 48

repo rate and market operations

Question 49

what are the monetary policy's variables?

Answer 49

money supply (Ms) and interests (i)

Question 50

what are the differences between expansionary monetary policy?

Answer 50

Expansionary monetary policy is when repo rate is decreased and money supply increases Contractionary monetary policy is when the repo rate is increased and the money supply decreases.