Economics Chapter on GDP and Circular Flow
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Questions and Answers

What is a primary factor influencing a new graduate's job search experience?

  • The prevailing economic conditions at the time of their job search. (correct)
  • The geographic location where the graduate is seeking employment.
  • The graduate's personal skills and qualifications.
  • The specific industry the graduate is targeting.

What is a key indicator that firms are expanding their production of goods and services?

  • Decreasing employment rates.
  • Rising employment and availability of jobs. (correct)
  • Stagnant wages across all sectors.
  • Rising unemployment rates.

In an economic contraction, what is a common indicator?

  • Increased production and easy job access.
  • High production and high employment rates
  • Reduced production and difficulty finding jobs. (correct)
  • Stable production and consistently easy job access.

Beyond individual experiences, why are changes in economic conditions widely reported?

<p>Because they profoundly affect everyone. (C)</p> Signup and view all the answers

What is widely reported in media to provide insights into the current economical conditions?

<p>Newly reported economical statistics. (D)</p> Signup and view all the answers

When unemployment rises and jobs become difficult to find, what is a likely cause?

<p>An economical contraction where firms are cutting back. (B)</p> Signup and view all the answers

Which of the following best describes the relationship between production and employment during economic expansion?

<p>Increased production leads to rising employment. (C)</p> Signup and view all the answers

What is one factor that differentiates the job market during times of economic expansion compared to times of economic contraction?

<p>Job search times are shorter during economic expansions (B)</p> Signup and view all the answers

In a simple economy, the circular-flow diagram illustrates transactions between which two key economic agents?

<p>Households and firms (D)</p> Signup and view all the answers

According to the circular-flow model, how is total expenditure defined in this simplified model?

<p>The total amount of household purchases of goods and services. (A)</p> Signup and view all the answers

In the circular-flow model, what constitutes the income of households according to the discussion?

<p>Wages, rent, and profit (C)</p> Signup and view all the answers

In the circular flow of the simple economy, from where do firms derive the funds needed to pay wages, rent, and profit?

<p>Sales from goods and services (D)</p> Signup and view all the answers

If an economy's GDP is calculated by adding up total expenditure, and then recalculated by summing total income, what would be the relationship?

<p>The two calculations would result in the same value. (A)</p> Signup and view all the answers

In the context of the circular-flow model, which of the following best represents where households send their expenditure?

<p>To firms in exchange for goods and services (D)</p> Signup and view all the answers

According to the explanation, what is a real world complication in applying the described circular-flow model?

<p>Households do not spend all of their income on goods and services. (D)</p> Signup and view all the answers

What is the dual nature of the money flow described in the circular-flow model?

<p>It is both an expense to the purchaser and income for the receiver. (A)</p> Signup and view all the answers

According to the provided data, what was the approximate percentage of GDP attributed to Investment (I) in 1998?

<p>16% (A)</p> Signup and view all the answers

If a U.S. household buys a $50,000 car from a German manufacturer, what impact does this transaction have on the components of the U.S. GDP?

<p>Consumption increases by $50,000, and net exports decreases by $50,000 (D)</p> Signup and view all the answers

A government payment for unemployment benefits is best described as:

<p>A transfer payment. (B)</p> Signup and view all the answers

Using the GDP identity $Y = C + I + G + NX$, if consumption (C) is $6000, investment (I) is $1500, government purchases (G) is $2000 and net exports (NX) are $-500$, then what is GDP (Y)?

<p>$9,000 (A)</p> Signup and view all the answers

According to the table provided, what can be inferred about net exports in the US economy in 1998?

<p>The US had a trade deficit. (A)</p> Signup and view all the answers

Which of the following best explains why the purchase of a foreign good does not directly impact GDP?

<p>The increase in consumption, investment, or government purchases is offset by a decrease in net exports. (C)</p> Signup and view all the answers

If the government increases spending on infrastructure and simultaneously raises taxes by the same amount, what impact will this have on the key components of GDP?

<p>Government purchases will increase; consumption, investment and net exports will remain constant. (C)</p> Signup and view all the answers

Which of the following scenarios would be counted under 'Investment' when calculating GDP?

<p>A household buying a newly built house. (C)</p> Signup and view all the answers

Why is real GDP used instead of nominal GDP when measuring economic output?

<p>Real GDP uses constant prices, thus eliminating the effect of price changes. (C)</p> Signup and view all the answers

How is a base year used when calculating real GDP?

<p>The base year's prices are used to value goods and services in all years. (B)</p> Signup and view all the answers

What is the relationship between nominal GDP and real GDP in the base year?

<p>Nominal GDP is always equal to real GDP in the base year. (D)</p> Signup and view all the answers

If real GDP increases, what does this signify?

<p>An increase in the quantities of the goods and services produced, with prices held constant. (D)</p> Signup and view all the answers

Suppose 2010 is the base year. In 2020, a country's nominal GDP was $1000 billion, while its real GDP was $1200 billion. What can be inferred from this information?

<p>The price levels in 2020 were lower than in 2010. (B)</p> Signup and view all the answers

Which best describes nominal GDP?

<p>It values goods at current year prices. (C)</p> Signup and view all the answers

What happens to real GDP if the quantities produced stays the same but the price of goods increases.

<p>Real GDP remains the same. (C)</p> Signup and view all the answers

Why is it important to use constant prices when calculating real GDP?

<p>Constant prices help in analyzing changes in production volume and not price levels. (A)</p> Signup and view all the answers

According to the provided data, which country has the highest GDP per capita?

<p>Mexico (B)</p> Signup and view all the answers

Based on the data, which of the countries listed has the lowest life expectancy?

<p>Nigeria (D)</p> Signup and view all the answers

Which of the following countries has a life expectancy closest to the global average of 67?

<p>Brazil (B)</p> Signup and view all the answers

According to the provided data, which country has the highest adult literacy rate?

<p>Russia (B)</p> Signup and view all the answers

What does the article suggest about the discrepancies in Russian economic data?

<p>The shadow economy and tax evasion may be significant. (C)</p> Signup and view all the answers

What is suggested as a significant reason for the challenges in measuring economic activity in post-communist countries?

<p>The transition to capitalism creates statistical inconsistencies. (C)</p> Signup and view all the answers

According to the article, what do critics of the Russian government claim regarding the new economic calculations?

<p>They are more propaganda than economic reality. (D)</p> Signup and view all the answers

Based on the provided information, what can be inferred about the reliability of official economic statistics in the Russian Federation?

<p>They do not always fully capture the total economic activity. (A)</p> Signup and view all the answers

Why does GDP include only the value of final goods and not intermediate goods?

<p>The value of intermediate goods is already included in the prices of final goods. (C)</p> Signup and view all the answers

If a bakery produces flour to be used in its own cakes, how should the flour be accounted for in GDP, and what if they decided to store that flour instead of using it right away?

<p>The value of the flour is considered an investment, and would be included in GDP. This is true if it's used later or kept in inventory. (A)</p> Signup and view all the answers

Which of the following best illustrates a service that is included when calculating GDP?

<p>Paying a plumber to fix a leaky faucet. (D)</p> Signup and view all the answers

Why is the sale of a used car not included in the calculation of GDP?

<p>The value of the used car was already included in GDP when it was initially produced. (B)</p> Signup and view all the answers

If a US citizen works at a factory in Canada, where is the value of their production included?

<p>It is included in Canadian GDP since the production occurred in Canada. (A)</p> Signup and view all the answers

Which transaction is NOT included in the calculation of a country's GDP?

<p>The value of a second-hand book sold at a garage sale. (A)</p> Signup and view all the answers

How are changes in business inventories factored into GDP calculations?

<p>Increases in inventory are added to GDP and decreases are subtracted, reflecting increased/decreased production. (B)</p> Signup and view all the answers

Which measure is described as the total income earned by a nation's residents in the production of goods and services?

<p>National Income (D)</p> Signup and view all the answers

Flashcards

National Income

The total amount of money that all individuals and firms in an economy earn in a given period of time.

National Expenditure

The total amount of money that all individuals and firms in an economy spend in a given period of time.

Gross Domestic Product (GDP)

The total value of all final goods and services produced in an economy in a given period of time.

Real GDP

A measure of the economy's output using constant prices. It corrects for inflation.

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Nominal GDP

A measure of the economy's output using current prices. It does not correct for inflation.

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Consumption (C)

It represents the spending by households on goods and services, excluding new housing.

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Investment (I)

It represents the spending by firms on new factories, equipment, and buildings.

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Government Spending (G)

It represents the spending by the government on goods and services.

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Household Expenditure

The total spending by households on goods and services.

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Household Income

The total income earned by households from wages, rent, and profits.

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Firm Expenditure

The total amount of money spent by firms on wages, rent, and profits to acquire factors of production (labor, land, and capital).

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GDP as Income

The total value of goods and services produced in an economy, as measured by the total income earned by households.

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GDP as Expenditure

The total value of goods and services produced in an economy, as measured by the total expenditure on those goods and services.

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Circular-Flow Diagram

A model that shows the flow of money between households and firms in an economy.

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Equality of Income and Expenditure

The idea that GDP, whether measured as total income or total expenditure, represents the same value.

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What is GDP?

The total market value of all final goods and services produced within a country's borders during a specific period, typically a year.

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What is consumption (C)?

Spending by households on goods and services, excluding new housing.

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What is investment (I)?

Spending by firms on new factories, equipment, and buildings.

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What is government spending (G)?

Spending by the government on goods and services.

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What are net exports (NX)?

The difference between the value of a country's exports and imports.

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What is GDP?

The total value of all final goods and services produced within a country's borders during a specific period, typically a year. It is the sum of consumption, investment, government spending, and net exports.

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What are transfer payments?

Government spending that does not involve the exchange for currently produced goods or services, such as Social Security payments.

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What is a government budget surplus?

A government budget surplus occurs when government revenue exceeds government spending.

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Why does GDP only include final goods?

GDP only includes the value of final goods and services, not intermediate goods used in the production process. This avoids double-counting, as the value of intermediate goods is already reflected in the final price.

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How are inventory investments treated in GDP?

When a firm produces an intermediate good but adds it to inventory instead of using it immediately, the intermediate good is treated as a final good for that period. This inventory investment is added to GDP.

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What does GDP include: Goods or services?

GDP includes both tangible goods, like cars and clothes, and intangible services, like haircuts and concerts. Both contribute to a nation's economic output.

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Does GDP include goods produced in the past?

GDP includes goods and services produced in the current period, not transactions involving previously produced items. A new car sale is included in GDP, but a used car sale is not.

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Where does GDP measure production?

GDP measures the value of production within a country's borders, regardless of the nationality of the producers. A Canadian working in the US contributes to US GDP, even though they're not American.

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What is National Income?

National income is the total income earned by a country's residents from the production of goods and services. It includes wages, salaries, profits, rent, and interest.

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Shadow Economy

The difference between the official GDP and the actual economic activity taking place in a country, often due to unrecorded or illegal activities.

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National Income Accounting

The government's attempt to measure a country's economic activity and performance.

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Statistical Challenges

Refers to the inaccuracies and inconsistencies in economic data, particularly in emerging or transitional economies where informal sectors might be large.

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Economic Growth

A measure of how much a country's economy is growing or shrinking over time.

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Measuring Economic Activity in Post-Socialist Countries

The difficulty in accurately measuring economic activity in former communist countries transitioning to market economies.

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Exchange Rate

The value of a currency relative to other currencies in the international market.

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Shadow Banking

The practice of keeping money outside of official banking channels to avoid taxes or regulations.

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Base Year

The year chosen to establish the prices used to calculate real GDP.

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Constant Prices

The prices of goods and services in a particular year.

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Base Year Relation

Real GDP and nominal GDP will be equal in the base year because the prices used are the same.

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Real GDP Calculation

Real GDP is calculated by using the base year prices and the current year’s quantities.

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Real GDP Increase

When real GDP increases, it indicates an increase in the quantity of goods and services produced.

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Nominal GDP Increase

An increase in nominal GDP can be due to both an increase in the quantity of goods and services produced and an increase in prices.

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Study Notes

GDP Definition

  • Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given period.

Income vs Expenditure

  • Income equals expenditure in an economy
  • Each transaction involves a buyer and seller. Buyer's spending is the seller's income.

Circular Flow Diagram (Figure 22-1)

  • Illustrates transactions between households and firms
  • Households buy goods/services from firms
  • Firms use revenue to pay wages, rent, profit
  • Money flows continuously between households and firms

Components of GDP (Y = C + I + G + NX)

  • Consumption (C): Spending by households on goods/services (excluding new housing).
  • Investment (I): Spending on capital equipment, inventories, and structures, including new housing.
  • Government Purchases (G): Spending on goods/services by local, state, and federal governments.
  • Net Exports (NX): Exports (domestic goods sold abroad) - imports (foreign goods bought domestically)

Nominal vs Real GDP

  • Nominal GDP: Value of goods/services at current prices
  • Real GDP: Value of goods/services at constant (base year) prices
  • Economists use real GDP to see how the total quantity of goods/services produced changes over time without the influence of price changes.

GDP Deflator

  • Ratio of nominal GDP to real GDP, multiplied by 100
  • Measures the overall level of prices in the economy.

Other Measures of Income

  • Gross National Product (GNP): Total income earned by a nation's permanent residents, including income from abroad, excluding income of foreigners in the country.
  • Net National Product (NNP): GNP minus losses from depreciation.
  • National Income: Total income earned by a nation's residents, excluding indirect business taxes but including business subsidies.
  • Personal Income: Income received by households and non-corporate businesses.
  • Disposable Personal Income: Income left after personal taxes.

GDP and Economic Well-being

  • GDP is a good, but not perfect, measure.
  • GDP does not include: leisure, environment quality, distribution of income.
  • GDP does well to measure overall production and income, but does not capture all aspects of well-being.

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Measuring a Nation's Income PDF

Description

Explore the essential concepts of Gross Domestic Product (GDP), including its definition and components such as consumption, investment, government purchases, and net exports. Understand the circular flow of income and expenditure in an economy through a visual representation. Test your knowledge on these fundamental economic principles.

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