Chapter 7 Economics quiz

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Questions and Answers

What does Gross Domestic Product (GDP) measure?

Total production within a country's borders (correct)

Total government expenditures within a year

Total income generated by a country's residents

Total consumption by individuals in a country

Which of the following components is NOT part of the Expenditure Approach to GDP?

Net Exports (X-M)

Gross Private Domestic Investment (I)

Consumption Expenditure (C)

Net Domestic Product (NDP) (correct)

How is Nominal GDP calculated?

Price of goods in the base year times the quantity in the same year

Price of goods in the current year times the quantity in the same year (correct)

Price and quantity for all years averaged

Total income generated minus total consumption

What does the GDP Deflator represent?

A measure of the overall level of prices in the economy Signup and view all the answers

Which formula correctly represents the calculation of the Real GDP Growth Rate?

(Real GDP in Current year - Real GDP in Base year) ÷ Real GDP in Base year x 100 Signup and view all the answers

What does GDP measure in an economy?

Total production of goods and services Signup and view all the answers

Which group uses GDP to know when to apply policy changes?

Central banks Signup and view all the answers

Why is measuring GDP important for businesses?

For assessing the demand and health of the economy Signup and view all the answers

What must total income earned in an economy be identical to?

The total output value Signup and view all the answers

What is the significance of measuring GDP for governments?

To determine changes in fiscal policies Signup and view all the answers

Which of the following best describes 'final goods and services'?

Goods at their final stage of production Signup and view all the answers

In the context of the circular flow model, what role do factor markets play?

They are where businesses purchase resources. Signup and view all the answers

For what purpose do central banks monitor GDP growth?

To have insights for monetary policy adjustments Signup and view all the answers

Which of the following items is classified as a final good?

A lawn mower purchased by a household Signup and view all the answers

What is the purpose of GDP in relation to economic forecasts?

It provides insights on growth trends in the economy. Signup and view all the answers

Why are intermediate goods excluded from GDP calculations?

They would cause double counting in GDP assessments. Signup and view all the answers

Which of the following is NOT one of the limitations of GDP?

It reflects the distribution of goods and services. Signup and view all the answers

What adjustment does per capita GDP provide?

It adjusts GDP for population to show average economic output per person. Signup and view all the answers

How does GDP fail to account for overall well-being in an economy?

It solely measures market transactions. Signup and view all the answers

Which of the following statements about GDP is true?

It captures the value of all goods and services produced in a country. Signup and view all the answers

When comparing living standards globally, what must be considered aside from GDP?

Purchasing power and price comparisons. Signup and view all the answers

Study Notes

Macroeconomics Chapter 7: Measuring the Economy's Performance

Macroeconomics studies the "big picture" economic issues.
Governments use past data and models to predict future economic trends.
The macroeconomy significantly impacts personal and professional lives, particularly related to the stock market.
The study explores factors like economic wealth disparity between countries and the slow progress of some.
National income accounting measures national income and its components.
GDP measures the total market value of all final goods and services produced annually.

Learning Objectives

Describe economic activity and the circular flow of income and output.
Explain the measurement of gross domestic product (GDP).
Explain why GDP is important and how it's used.
Explain the two methods of calculating GDP: expenditure and income approaches.
Explain how various subcomponents of GDP are calculated.
Understand the limitations of GDP.

The Importance of Macroeconomics

Macroeconomics answers questions about economic growth, such as why some countries are rich and others are poor.
Understanding how economic factors impact personal and professional lives is key.
Stock market fluctuations directly reflect macro-economic conditions.

Measuring GDP

National income accounting estimates national income and its components.
GDP accounts for the total market value of all final goods and services during a given year.

The Circular Flow of Income and Output

Businesses produce goods and services utilizing factors of production (like labor, capital, land, and entrepreneurship) from households in factor markets.
Households receive payment for factors they provide.
Businesses sell goods and services to households in product markets, generating income for the businesses.
The total value of output = total income.
The circular flow of income and output illustrates a continuous flow between businesses and households.
This circular flow consists of factor markets and product markets.

The Simple Circular flow

Product markets include all transactions where goods and services are bought and sold.
Households purchase goods and services in product markets.
Factor markets include all transactions where factors of production are bought and sold.
Businesses buy factors of production—labor, capital, land, and entrepreneurship—in factor markets from households.

Key Terms

Total income is the yearly amount earned by a country's factors of production.
Total income = Wages + Rents + Interest + Profits
Factor markets allow businesses to purchase resources from households.
Product markets allow households to purchase goods and services from businesses.
GDP can be calculated using the Expenditure Approach.
Consumption expenditures (C) include expenditures by households on durable, non-durable goods, and services.
Gross Private Domestic Investment (I) includes additions to productive capacity.
Government Expenditures (G) include all government purchases of goods and services.
Net exports (X-M) considers the difference between exports and imports (X - M).
GDP can also be calculated through the Income Approach.
This measures the total factor income paid to all households for their contribution to production.
All income paid to households from their factors of production= Wages + Rents + Interest + Profits
Intermediate goods are used directly in producing final goods and are not counted in GDP to avoid double-counting

Other Components of GDP

Net Domestic Product (NDP) is calculated by deducting capital consumption allowance from GDP.
Capital consumption allowance accounts for the reduction in capital goods’ value due to wear, tear, and obsolescence over a year.
National Income (NNI).
NNI is based on NDP less indirect business taxes less subsidies plus net investment income.
NNI is the income earned by the factors of production.
Personal Income (PI) is the total amount of income received by households before paying personal income taxes.
Disposable Personal Income (DPI) is Personal Income minus personal income taxes.
Personal Saving (S) is the income remaining from disposable income after consumption.

Nominal and Real GDP

Nominal GDP measures GDP using current prices.
Real GDP measures GDP using constant prices (to negate inflation).
The GDP deflator adjusts for changes in prices to allow comparison over time.
Real GDP growth rate shows the production changes over time

Limitations of GDP

GDP doesn't account for population size (hence per capita GDP is calculated).
GDP doesn't consider the distribution of output.
GDP ignores non-marketed household production (e.g., home-cooked meals).
GDP excludes underground or informal economic activities.
GDP doesn't account for leisure time, environmental quality, or health and life expectancy.
It only reflects market prices of production, not well-being.