Week 1 - Introduction

Question 1

What are the two key sources of growth?

Answer 1

• Population Growth

- Increase in the average productivity of labour.

Question 2

What are the two definitions of GDP (expenditure and income)?

Answer 2

• Total expenditure on domestically-produced final goods and services.
• Total income received by all domestically-located factors of production.
  NOTE: The sum value of these two measures of GDP is the same! This is because every pound spent is income to the seller.

Question 3

What is value added?

Answer 3

Value of final output - the value of intermediate goods used to produce that output.

Question 4

What is the definition of investment, and what forms can it take?

Answer 4

Definition: Spending on goods bought for future use.

• Business fixed investment: i.e new factory
• Residential fixed investment: spending by consumers and landlords on residential units.
• Inventory investment: Change in the value of all firms’ inventory.

Question 5

What is the difference between a stock and a flow?

Answer 5

• A stock is a quantity measured at a given point in time. Thus, the level of capital is a stock.
• A flow is a quantity measured per unit of time.

Question 6

What’s the difference between GNP and GDP?

Answer 6

GNP: Total income earned by nations fop’s, regardless of where they’re located.
GDP: Total income earned by domestically-located fop’s, regardless of nationality.
Note: GNP-GDP = factor payments from abroad - factor payments to abroad.

Question 7

What is the formula for CPI?

Answer 7

100*(Current cost of basket / Cost of basket in base year)

Question 8

Why might CPI overstate inflation?

Answer 8

• Substitution bias: Uses fixed weights, so cannot reflect the fact consumers change consumption patterns in response to changes in relative prices.
• Introduction of new goods: New goods (especially technology) effectively increases the value of the pound.
• Unmeasured changes in quality: Goods may become of a higher standard, again increasing the purchasing power of the pound, but this is not reflected in CPI.

Question 9

What are the four economic categories of the population?

Answer 9

• Employed
• Unemployed
• Labour force: Employed + Unemployed
• Not in the labour force

Question 10

What is the unemployment rate, and the labour force participation rate?

Answer 10

Unemployment: (Unemployed / Labour force)
LFPR: (Labour force / total population)