Week 1 LT

Question 1

What is GDP

Answer 1

The total market value of all FINAL goods and services produced within a country in a given period of time

Question 2

What is the production measure of GDP

Answer 2

The number of goods produced within the economy

Question 3

What is the expenditure measure of GDP

Answer 3

The total purchases in the economy

Question 4

What is the income measure of GDP

Answer 4

All the income earned in the country

Question 5

What is the national income identity

Answer 5

Y(GDP) = C(Consumption) + I(Investment) + G(Government Purchases) + NX(Exports - Imports)

Question 6

Examples of factors contributing to the income approach

Answer 6

Employee compensation, wages, royalties, corporate profits

Question 7

What is net domestic product

Answer 7

GDP - depreciation = net domestic product

Question 8

Price deflator formula

Answer 8

nominal GDP / Real GDP

Question 9

CPI formula

Answer 9

Cost of base year quantities at current prices / cost of base year quantities at base year prices

Question 10

two problems in measuring real GDP and price level

Answer 10

the relative prices of goods change over time
the quality of goods and services change over time
New goods introduced, old become obsolete

Question 11

What is the national income accounting equation

Answer 11

Production = Expenditure = Income

Question 12

What is the largest expenditure in GDP

Answer 12

Consumption e.g. food, housing, cars etc

Question 13

What accounting characteristic does the income equation have

Answer 13

If one increases another component decreases to balance it

Question 14

What is the largest component of the income approach to GDP

Answer 14

Compensation of employees

Question 15

WHat is the typical share of labour and capital in the income approach to GDP

Answer 15

2/3 labour, 1/3 capital

Question 16

What does no double counting mean in production gdp

Answer 16

e.g. if aa manufacturer makes 10mil of steel and a car company buys and uses it to make 100mil of cars, GDP goes up by 100mil not 110mil

Question 17

Limitations of GDP - what important factors are not included

Answer 17

Health of nations people - very important effect which is not really reflected in GDP

Doesnt include changes in environmental resources - e.g. extracting oil and selling it increases GDP but nothing to account for the reduction of natural resources and pollution

Question 18

equation linking nominal GDP and real GDP

Answer 18

nominal GDP = price level x real GDP

Question 19

What is the Laspeyers index

Answer 19

The method of computing the change in real GDP with the initial prices

Question 20

What is the Paasche index

Answer 20

the method of computing the change in real GDP with the final prices

Question 21

Example highlighting the difference between laspeyers and paasche

Answer 21

Laspeyers index using 1960 prices for computers would give a very high weight in thiis category aas computers were much more expensive. paasche index using 2020 prices for computers would have a lower weight

Question 22

What is the Fisher index

Answer 22

Chain weighted index of real GDP computed as the average of the laspeyers and paasche indexes

Question 23

what price is used when ccalculating GDP to compare countries

Answer 23

average world prices to account for the fact that goods cost differently in countries e.g. rice cheaper in asia thaat the US

Question 24

what is the general trend for price levels in ricch vs poor countries

Answer 24

rich countries tend to have higher price level ie higher prices for goods than in poor countries

Question 25

GDP definition in terms of value added

Answer 25

GDP is the sum of the value added at each stage in the production process

Question 26

what does real gdp reflect

Answer 26

chaanges in actual production vs price level changes

Question 27

why is cpi inflation value different to price deflator value

Answer 27

CPI measures only price difference whereas pricce deflator also accounts for changes in quantity

Question 28

where does the true value of inflation lie

Answer 28

between CPI and price deflator
CPI ignores substitution effect so it overstates inflation
Price deflator is too influenced by substitutes so understates inflation