Economic Growth and Unemployment
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Questions and Answers

What is a necessary condition to reduce unemployment?

  • Increasing production of goods and services (correct)
  • Skills mismatch to the new requirements of the changing structure of the economy
  • Insufficient skills in the labour force
  • Decreasing 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 ______________.

    <p>inflation</p> Signup and view all the answers

    Match the following macroeconomic objectives with their descriptions:

    <p>Full Employment = reducing unemployment Price Stability = moderate and low inflation Economic Growth = increasing production of goods and services</p> Signup and view all the answers

    What is the difference between correlation and causation?

    <p>Correlation is when x goes up, y goes down, while causation is when x goes up, it causes y to also go down.</p> Signup and view all the answers

    Potential output can be measured directly.

    <p>False</p> Signup and view all the answers

    What is the output gap?

    <p>The deviation between actual output and its trend or potential output.</p> Signup and view all the answers

    Potential output is the maximum amount of goods and services an economy can produce when it is operating at a high rate of _______________________.

    <p>resource utilization</p> Signup and view all the answers

    What is an estimate of the level of GDP attainable when the economy is operating at a high rate of resource utilization?

    <p>Potential output</p> Signup and view all the answers

    Match the following economic concepts with their descriptions:

    <p>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</p> Signup and view all the answers

    Economic theory is not necessary to determine causality.

    <p>False</p> Signup and view all the answers

    Rising annual inflation and positive output gaps influence and generate an increase in _______________________.

    <p>monetary policy rates</p> Signup and view all the answers

    Why do economists use real GDP instead of nominal GDP?

    <p>To get a clearer picture of economic welfare and growth</p> Signup and view all the answers

    Nominal GDP is a more accurate measure of economic growth than real GDP.

    <p>False</p> Signup and view all the answers

    What is the purpose of identifying a base year for normalizing prices?

    <p>To remove any price effects and get a more accurate measure of economic growth/activity across years</p> Signup and view all the answers

    Real GDP is measured in ______________________ prices.

    <p>constant</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>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</p> Signup and view all the answers

    What is the main advantage of using real GDP over nominal GDP?

    <p>It gives a more accurate measure of economic growth</p> Signup and view all the answers

    What is GDP a measure of?

    <p>Aggregate output or production in national accounts</p> Signup and view all the answers

    What is the formula to calculate GDP?

    <p>C + I + G + X – M</p> Signup and view all the answers

    GDP is a good measure of a country's economy and living standards.

    <p>False</p> Signup and view all the answers

    Gross capital formation is the same as fixed capital formation.

    <p>False</p> Signup and view all the answers

    What is GDP per capita?

    <p>GDP per capita is GDP divided by population.</p> Signup and view all the answers

    What is the main difference between government spending and government capital formation?

    <p>Government spending excludes transfers and capital formation, while government capital formation includes the purchase of capital goods.</p> Signup and view all the answers

    GDP does not account for _________________ of income.

    <p>distributions</p> Signup and view all the answers

    The total domestic income is also known as ______________.

    <p>aggregate demand</p> Signup and view all the answers

    Why does GDP not necessarily mean people are happier?

    <p>Because extra production may mean less leisure time</p> Signup and view all the answers

    Match the following components of GDP with their definitions:

    <p>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</p> Signup and view all the answers

    Match the following:

    <p>GDP = Measure of aggregate output GNI = Measure of income earned by citizens GNP = Measure of income earned by foreigners</p> Signup and view all the answers

    GDP accounts for non-market production, such as subsistence farming and homemakers.

    <p>False</p> Signup and view all the answers

    Economic growth is the same as economic development.

    <p>False</p> Signup and view all the answers

    What is a limitation of GDP in measuring living standards?

    <p>One limitation is that GDP does not consider externalities such as pollution and spillover effects.</p> Signup and view all the answers

    What is the component of GDP that includes spending on durable, semi-durable, and non-durable goods and services?

    <p>Consumption (C)</p> Signup and view all the answers

    What is the purpose of excluding transfers in government spending?

    <p>To avoid double-counting.</p> Signup and view all the answers

    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).

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