35 Questions
What is a necessary condition to reduce unemployment?
Increasing production of goods and services
Inflation is equivalent to price stability.
False
What is an example of a industry that may face stiff competition from cheap imports?
textile industry
Price stability refers to moderate and low ______________.
inflation
Match the following macroeconomic objectives with their descriptions:
Full Employment = reducing unemployment Price Stability = moderate and low inflation Economic Growth = increasing production of goods and services
What is the difference between correlation and causation?
Correlation is when x goes up, y goes down, while causation is when x goes up, it causes y to also go down.
Potential output can be measured directly.
False
What is the output gap?
The deviation between actual output and its trend or potential output.
Potential output is the maximum amount of goods and services an economy can produce when it is operating at a high rate of _______________________.
resource utilization
What is an estimate of the level of GDP attainable when the economy is operating at a high rate of resource utilization?
Potential output
Match the following economic concepts with their descriptions:
Correlation = A statistical relationship between two variables Causation = A cause-and-effect relationship between two variables Output Gap = The deviation between actual output and its trend or potential output Potential Output = The maximum amount of goods and services an economy can produce when it is operating at a high rate of resource utilization
Economic theory is not necessary to determine causality.
False
Rising annual inflation and positive output gaps influence and generate an increase in _______________________.
monetary policy rates
Why do economists use real GDP instead of nominal GDP?
To get a clearer picture of economic welfare and growth
Nominal GDP is a more accurate measure of economic growth than real GDP.
False
What is the purpose of identifying a base year for normalizing prices?
To remove any price effects and get a more accurate measure of economic growth/activity across years
Real GDP is measured in ______________________ prices.
constant
Match the following terms with their definitions:
Nominal GDP = GDP measured in current prices Real GDP = GDP measured in constant prices Base year = Year used for normalizing prices Inflation = Rise in general price level
What is the main advantage of using real GDP over nominal GDP?
It gives a more accurate measure of economic growth
What is GDP a measure of?
Aggregate output or production in national accounts
What is the formula to calculate GDP?
C + I + G + X – M
GDP is a good measure of a country's economy and living standards.
False
Gross capital formation is the same as fixed capital formation.
False
What is GDP per capita?
GDP per capita is GDP divided by population.
What is the main difference between government spending and government capital formation?
Government spending excludes transfers and capital formation, while government capital formation includes the purchase of capital goods.
GDP does not account for _________________ of income.
distributions
The total domestic income is also known as ______________.
aggregate demand
Why does GDP not necessarily mean people are happier?
Because extra production may mean less leisure time
Match the following components of GDP with their definitions:
Consumption (C) = Expenditure on consumer goods and services Investment (I) = Government expenditure on goods and services Government spending (G) = Expenditure on newly produced capital goods Net exports (X - M) = Exports minus imports
Match the following:
GDP = Measure of aggregate output GNI = Measure of income earned by citizens GNP = Measure of income earned by foreigners
GDP accounts for non-market production, such as subsistence farming and homemakers.
False
Economic growth is the same as economic development.
False
What is a limitation of GDP in measuring living standards?
One limitation is that GDP does not consider externalities such as pollution and spillover effects.
What is the component of GDP that includes spending on durable, semi-durable, and non-durable goods and services?
Consumption (C)
What is the purpose of excluding transfers in government spending?
To avoid double-counting.
Study Notes
Full Employment
- Economic growth is a necessary condition to reduce unemployment, but not necessarily a sufficient condition to reduce unemployment.
- Increasing production of goods and services will likely reduce unemployment, but may not necessarily result in a substantial reduction in unemployment due to:
- Insufficient skills in the labour force (e.g., South Africa).
- Skills mismatch to the new requirements of the changing structure of the economy (e.g., Cape Town's textile industry facing stiff competition from cheap imports from China).
Price Stability
- Price stability refers to moderate and low inflation.
- Inflation and price stability affect daily life, including individual prices such as food, cellphone costs, rent, transport, and laundry costs.
Correlation vs Causation
- Correlation: when x goes up, y goes down.
- Causation: when x goes up, it causes y to also go down.
- Economists use economic theory and econometric models to determine the existence of casual relationships.
- Example: rising annual inflation and positive output gaps influence and generate an increase in monetary policy rates.
The Output Gap
- The output gap is the deviation between actual output and its trend or potential output.
- Potential output is associated with the productive capacity of the economy, which is the maximum amount of goods and services an economy can produce when it is operating at a high rate of resource utilization.
- Potential output is an estimate of the level of GDP attainable when the economy is operating at full capacity.
Components of GDP
- GDP = Consumption (C) + Investment (I) + Government spending (G) + Net exports (X - M)
- Consumption (C) includes expenditure on durable, semi-durable, and non-durable goods and services by households.
- Investment (I) includes expenditure on newly produced capital goods, including equipment, buildings, and inventories.
- Government spending (G) includes government expenditure on goods and services, excluding transfers to avoid double-counting.
- Net exports (X - M) includes exports minus imports.
Economic Growth
- Economic growth is the increase in the production of goods and services in an economy over time.
- Real GDP gives a clearer picture of economic growth, welfare, and standard of living in an economy, as it removes the effects of inflation.
Nominal GDP vs Real GDP
- Nominal GDP is measured using current prices, whereas real GDP is measured using constant prices.
- Real GDP provides a more accurate measure of economic growth and activity across years.
GDP vs GNI
- GDP measures the market value of the goods and services produced within a country's borders.
- GNI (Gross National Income) measures the income earned by a country's citizens and businesses, regardless of where the income is earned.
- GNI = GDP - income earned by foreign-owned factors of production + income earned by South African citizens and businesses abroad.
Limitations of GDP
- GDP is a measure of aggregate output, but not a good measure of individual welfare or happiness.
- GDP per capita is a better measure for comparison, but still has limitations, such as:
- Not accounting for income distribution.
- Not considering externalities such as pollution and spillover effects.
- Not valuing non-market production (e.g., subsistence farming, homemakers).
Explore the relationship between economic growth and unemployment, including the impact of technological advancements on jobs.
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