GDP Overview and Calculation

Questions and Answers

What does GDP represent?

The value of all final goods and services produced domestically.

Consumption in the United States is about ____________ of GDP, and it moves relatively little over time.

68%

What does the demand measure of GDP accounting add together?

Consumption, investment, government purchases, and trade balance.

Which of the following are most likely classified by economists as consumer durable goods?

Automobiles Signup and view all the answers

If Gross Domestic Product equals $1.2 trillion and consumption equals $690 billion, investment equals $200 billion, and government spending equals $260 billion, what can we conclude?

Exports exceed imports by $50 billion. Signup and view all the answers

In order to avoid double counting, statisticians just count the __________________.

final goods and services Signup and view all the answers

Which of the following is not counted as a part of GDP?

The purchase of 100 shares of AT&T stock by your grandfather. Signup and view all the answers

_________ are now the largest single component of the supply side of GDP, representing over half of GDP.

Services Signup and view all the answers

_ is calculated by taking _ and then subtracting the value of how much physical capital is worn out, or reduced in value because of aging, over the course of a year.

NNP GNP Signup and view all the answers

What does GDP not directly include?

The value of intermediate goods sold during a period. Signup and view all the answers

What are the stages of a business cycle?

Expansion, peak, recession, trough. Signup and view all the answers

If imports exceed exports, as in recent years, then __________ exists.

a trade deficit Signup and view all the answers

By what percentage did Denmark's GDP per capita rise between 1980 and 2000?

120% Signup and view all the answers

Calculate the GDP per capita of India as measured in U.S. dollars given its GDP and population.

$418 Signup and view all the answers

By what percentage did the GDP of Canada increase from 1990 to 2000 in Canadian dollars?

47% Signup and view all the answers

What is the term for the gap between exports and imports in a nation's economy?

Trade balance. Signup and view all the answers

What determines the prevailing standard of living in a country?

Economic growth. Signup and view all the answers

Which of the following statements is true?

GDP includes spending on recreation and travel, but it does not cover leisure time. Signup and view all the answers

What is the difference between nominal GDP and real GDP?

Real GDP adjusts for inflation. Signup and view all the answers

The nominal value of any economic statistic refers to the number that is actually announced at that time, while the ________________ refers to the statistic after it has been adjusted for inflation.

real value Signup and view all the answers

What is Gross Domestic Product (GDP)?

The value of the final output of all goods and services produced within a country in a year. Signup and view all the answers

What is double counting in economics?

A potential mistake to be avoided in measuring GDP, in which output is counted more than once as it travels through the stages of production. Signup and view all the answers

What is an intermediate good?

Output provided to other businesses at an intermediate stage of production, not for final users. Signup and view all the answers

What does investment refer to in economics?

Refers to the purchase of new capital goods and residential housing construction, not stocks and bonds. Signup and view all the answers

What is a trade deficit?

Exists when a nation's imports exceed its exports and is calculated as imports minus exports. Signup and view all the answers

What is a trade surplus?

Exists when a nation's exports exceed its imports and is calculated as exports minus imports. Signup and view all the answers

How to calculate GDP?

GDP = Consumption + Investment + Government Spending + (exports - imports) Signup and view all the answers

What does Gross National Product (GNP) include?

What is produced domestically and what is produced by domestic labor and business abroad in a year. Signup and view all the answers

What is Net National Product (NNP)?

GNP subtracts the value of how much physical capital is worn out, i.e., depreciation. Signup and view all the answers

What is included in national income?

All income earned: wages, profits, rent, and profit income. Signup and view all the answers

What is nominal value in economics?

The economic statistic actually announced at that time, not adjusted for inflation. Signup and view all the answers

What is real value?

An economic statistic after it has been adjusted for inflation. Signup and view all the answers

The __________ Year is the year whose prices are used to compute the real statistic.

Base Signup and view all the answers

How to adjust nominal values to real values?

nominal GDP = GDP deflator x real GDP Signup and view all the answers

How to calculate real GDP?

Real GDP = 100 x Nominal GDP / Price Index Signup and view all the answers

What is a business cycle?

The relatively short-term movement of the economy in and out of recession. Signup and view all the answers

What is a recession?

A significant decline in national output. Signup and view all the answers

What is a depression in economic terms?

An especially lengthy and deep decline in output. Signup and view all the answers

What is the peak of a business cycle?

During the business cycle, the highest point of output before a recession begins. Signup and view all the answers

What is the trough of a business cycle?

During the business cycle, the lowest point of output in a recession, before recovery begins. Signup and view all the answers

What are the two considerations when comparing the GDP of different nations?

First, the GDP of a country is measured in its own currency, and comparing GDP between two countries requires converting to a common currency. Second, countries have very different numbers of people. Signup and view all the answers

What is an exchange rate?

The price of one currency in terms of another currency. Signup and view all the answers

What are market exchange rates?

They vary on a day-to-day basis depending on supply and demand in foreign exchange markets. Signup and view all the answers

What are PPP-equivalent exchange rates?

Provide a longer run measure of the exchange rate, which is typically used for cross country comparisons of GDP. Signup and view all the answers

How to convert GDP to a common currency?

Brazil's GDP in $US = Brazil's GDP in reals / exchange rate (reals / $US) Signup and view all the answers

What is GDP per capita?

The GDP per person in a country, calculated as GDP ÷ Population. Signup and view all the answers

What does standard of living refer to?

All elements that affect people's happiness, whether these elements are bought and sold in the market or not. Signup and view all the answers

What are some limitations of GDP as a measure of the standard of living?

GDP does not cover leisure time; GDP does not include actual environmental cleanliness, health, and learning; GDP does not count home production or underground economy; GDP has no saying about the level of inequality. Signup and view all the answers

Study Notes

GDP Overview

GDP refers to the total value of all final goods and services produced within a country during a specified year.
Consumption comprises approximately 68% of GDP in the United States and shows little fluctuation over time.

Components of GDP Calculation

To calculate the demand measure of GDP, sum consumption, investment, government expenditure, and the trade balance (exports minus imports).
In order to prevent double counting, only final goods and services are considered for GDP calculation.

Types of Goods and Services

Consumer durable goods include items like automobiles and furniture.
Services constitute the largest portion of GDP, accounting for over half of its total value.

Trade Balance

A trade deficit occurs when imports surpass exports, measured as imports minus exports.
Conversely, a trade surplus exists when exports exceed imports.

Changes in GDP

Business cycles reflect fluctuations in economic activity, comprised of four stages: expansion, peak, recession, and trough.
Nominal GDP represents the current market value of goods, while real GDP adjusts for inflation to reflect true economic growth.

Economic Growth and Living Standards

Economic growth, often evaluated through GDP changes, influences the standard of living within a nation.
GDP per capita is calculated by dividing GDP by the population, providing a measure of average economic output per person.

International Comparisons

When comparing GDP across countries, consideration of different currencies and population sizes is crucial.
Exchange rates are vital for converting GDP into a common currency, and can fluctuate daily based on market conditions.

Limitations of GDP

GDP does not account for leisure time, environmental health, or inequalities within a population.
It fails to measure home production or the underground economy, limiting its effectiveness as an indicator of overall well-being.

Key Calculations

GDP can be calculated with the formula: GDP = Consumption + Investment + Government Spending + (Exports - Imports).
Real GDP can be computed using the formula: Real GDP = 100 x Nominal GDP / Price Index.

Understanding Economic Indicators

Gross National Product (GNP) includes total output produced domestically and by domestic labor abroad.
Net National Product (NNP) is GNP minus depreciation, reflecting the value of capital worn out over time.

Definitions of Economic Terms

National Income encompasses all income earned, including wages, rents, and profits.
Intermediate goods are products used in the production of final goods and are not included in GDP calculations to avoid double counting.

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Description

This quiz covers the fundamentals of Gross Domestic Product (GDP), including its components, calculation methods, and the significance of consumption and trade balance. Understand the different types of goods and services that contribute to GDP and the implications of trade deficits and surpluses.