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Questions and Answers
What does the government budget surplus represent?
What does the government budget surplus represent?
- Government revenue is zero.
- Government spending exceeds government revenue.
- Government revenue exceeds government spending. (correct)
- Government spending and revenue are equal.
Which of the following equations represents the total output of a country, according to the content?
Which of the following equations represents the total output of a country, according to the content?
- 𝑌 = 𝑆 + 𝐼 + 𝐺 + 𝑁𝑋
- 𝑌 = 𝐶 + 𝐼 + 𝐺 + 𝑁𝑋 (correct)
- 𝑌 = 𝑊𝐿 + 𝑟𝐾 + 𝛿𝐾
- 𝑌 = 𝐹(𝐾, 𝐿)
What does the term 'capital income' represent in the circular flow diagram?
What does the term 'capital income' represent in the circular flow diagram?
- Payments made to workers for their labor.
- Government spending on goods and services.
- The value of goods and services produced by a country.
- Payments made to owners of capital for its use. (correct)
What is the relationship between net exports (NX) and the current account (CA) in the circular flow diagram?
What is the relationship between net exports (NX) and the current account (CA) in the circular flow diagram?
In the circular flow diagram, what does the financial market represent?
In the circular flow diagram, what does the financial market represent?
According to the content, what happens to the government budget when government saving (S) is negative?
According to the content, what happens to the government budget when government saving (S) is negative?
Which of the following accurately represents the factors influencing household income, according to the content?
Which of the following accurately represents the factors influencing household income, according to the content?
What does the equation 𝑌 = 𝐹(𝐾, 𝐿) represent in the circular flow diagram?
What does the equation 𝑌 = 𝐹(𝐾, 𝐿) represent in the circular flow diagram?
What does the Expenditure Approach to GDP measure?
What does the Expenditure Approach to GDP measure?
Which equation represents the Income Approach to calculating GDP?
Which equation represents the Income Approach to calculating GDP?
What is a limitation of using GDP as a measure of standard of living?
What is a limitation of using GDP as a measure of standard of living?
How can real GDP per capita be defined?
How can real GDP per capita be defined?
Why is real GDP important for economic analysis over time?
Why is real GDP important for economic analysis over time?
Flashcards
Value Added Approach
Value Added Approach
Measures GDP by summing all final goods and services produced.
Expenditure Approach
Expenditure Approach
GDP measured by the total spending on final goods and services in an economy.
Income Approach
Income Approach
Calculates GDP as the sum of all factor and non-factor payments.
Real GDP per Capita
Real GDP per Capita
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Limitations of GDP
Limitations of GDP
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Gross Domestic Product (GDP)
Gross Domestic Product (GDP)
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Circular Flow Diagram
Circular Flow Diagram
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Government Budget
Government Budget
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Budget Surplus
Budget Surplus
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Budget Deficit
Budget Deficit
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Net Exports (NX)
Net Exports (NX)
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Identity in Economics
Identity in Economics
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Household Income
Household Income
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Study Notes
Gross Domestic Product (GDP)
- GDP is the total market value of all final goods and services produced within a country in a given year.
- It includes all goods produced domestically, regardless of ownership (foreign-owned businesses are included).
- It excludes goods produced overseas.
Circular Flow Diagram
- Shows the flow of money and goods/services between households and firms.
- Households provide labor (L) and capital (K) to firms in exchange for income (Y).
- Firms use these factors to produce goods (using inputs like raw materials) which are then sold to households for consumption (C).
- Government (G) provides public goods/services and collects taxes (T).
- Foreign markets facilitate the flow of exports (EX) and imports (IM)
- Financial markets facilitate the flow of capital and funds.
Government
- Government budget surplus (SG) = T – G
- Budget surplus: SG > 0
- Budget deficit: SG < 0
Foreign Markets
- Net exports (NX) = EX - IM
- NX is part of the current account (CA).
- Foreign businesses need to buy Canadian currency to buy Canadian goods
Firms
- Production function: Y = F(K, L) - Output (Y) depends on capital (K) and labor (L)
- Expenditures = C + I + G + NX
Households
- Income (Y) = labor income (WL) + capital income (rK) + depreciation(δK)
- Household saving (SH).
Value Added Approach
- GDP equals the sum of all value added at each stage of production.
- Value added is the difference between a firm's sales revenue and the cost of the intermediate goods it purchases.
- Calculate GDP by summing the value added across all firms.
Expenditure Approach
- Y = C + I + G + NX (consumption + Investment + Government purchases + Net Exports)
Income Approach
- Y = WL + RK (labor income + capital income)
Real GDP per capita
- Average income of residents in terms of the domestic currency.
- Nominal GDP divided by the population.
- Useful for comparing incomes within a country over time.
- Adjusting for inflation is important when comparing incomes across countries or time periods.
Limitations of GDP
- GDP does not account for:
- Non-market activities
- Shadow economy
- Environmental degradation
- Leisure time
- Income distribution
Other Measures of Standard of Living
- GDP is not the only indicator of standard of living.
- Other measures include life satisfaction, average years of schooling, infant mortality, and life expectancy.
- These measures provide a more comprehensive picture of well-being.
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