Questions and Answers
What does Gross Domestic Product (GDP) measure?
It measures total income of everyone in the economy and the total expenditure on the economy's output of goods and services.
What is GDP?
The market value of all final goods and services produced within a country in a given period of time.
What are the four components of GDP?
Consumption (C), Investment (I), Government Purchases (G), Net Exports (NX).
What is consumption?
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What is Investment?
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What are Government purchases?
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What are Net exports?
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What is nominal GDP?
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What is real GDP?
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Real GDP is calculated by ____.
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What is the GDP deflator?
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How is the GDP deflator calculated? ____.
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Nominal GDP is calculated by ____.
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What doesn't GDP account for?
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What is inflation?
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How is the GDP calculated? ____.
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Inflation rate in GDP is calculated by ____.
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What is the Consumer Price Index (CPI)?
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How is CPI calculated? ____.
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What are the problems with the CPI?
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How does the CPI differ from the GDP deflator?
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Inflation rate in CPI is calculated by ____.
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Study Notes
Gross Domestic Product (GDP)
- Measures total income and total expenditure on the economy's output of goods and services.
- Defined as the market value of all final goods and services produced within a country over a specified time period.
Components of GDP
- Four main components:
- Consumption (C)
- Investment (I)
- Government Purchases (G)
- Net Exports (NX)
Consumption
- Total spending by households on both goods and services.
Investment
- Total spending on goods that will contribute to future production.
Government Purchases
- Includes spending on goods and services by local or national governments, excluding transfer payments like social security.
Net Exports
- Represents purchases of domestically produced goods and services by foreign entities, calculated as NX = exports - imports.
Nominal vs Real GDP
- Nominal GDP values production of goods and services at current prices.
- Real GDP values production of goods and services at fixed prices, eliminating inflation effects.
GDP Calculation
- Calculated as: C + I + G + (X - M).
- Real GDP calculated using fixed price values (P1 x Q + P2 x Q).
GDP Deflator
- A measure of the overall level of prices in the economy.
- Calculated through the formula: GDP deflator = 100 x Nominal GDP / Real GDP.
Limitations of GDP
- GDP does not account for household production, underground economy activities, or the value of leisure.
Inflation
- Defined as an increase in the general price levels of goods and services within an economy.
Consumer Price Index (CPI)
- Measures the overall cost of goods and services bought by a typical consumer.
- Calculated using the formula: 100 x (cost of basket in current year)/(cost of basket in base year).
Inflation Rates
- Calculated for GDP using: 100 x (GDP deflator this year - GDP deflator last year) / GDP deflator last year.
- CPI inflation calculated as: 100 x (CPI this year - CPI last year) / CPI last year.
CPI vs GDP Deflator
- CPI measures changes in price levels for a typical consumer's basket, while GDP deflator reflects the price level changes of all final goods and services produced.
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Description
Test your knowledge of Gross Domestic Product (GDP) with these flashcards. Learn about what GDP measures, its definition, and the key components that make it up. Perfect for students looking to strengthen their understanding of economic principles.
