Introduction to Economics Quiz
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Questions and Answers

What does the investment component of GDP primarily include?

  • Transfer payments made by the government
  • Purchase of capital goods for future production (correct)
  • Exports purchased by foreign residents
  • Government consumption expenditures

Which of the following is NOT included in government purchases?

  • Salaries of government employees
  • Government spending on infrastructure
  • Welfare benefits provided to residents (correct)
  • Military expenditures

Which of the following items are included in the measurement of GDP?

  • Services provided by unpaid volunteers
  • Tangible goods sold in retail markets (correct)
  • Goods produced and consumed at home
  • Illegal drugs sold on the black market

How are net exports calculated?

<p>Exports minus imports (C)</p> Signup and view all the answers

What was the approximate GDP per person in the U.S. in 2015?

<p>$55,822 (A)</p> Signup and view all the answers

What is implied by the term 'final' in the context of GDP measurement?

<p>It refers only to the final sale price of goods. (A)</p> Signup and view all the answers

Which component of GDP is represented by the letter 'C' in the GDP identity Y = C + I + G + NX?

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

What percentage of the U.S. GDP was consumption in 2015?

<p>68% (C)</p> Signup and view all the answers

How is GDP affected by the production of goods and services?

<p>It measures the total value produced within a country. (D)</p> Signup and view all the answers

Which of the following correctly describes net exports in the U.S. in 2015?

<p>Negative, indicating more imports than exports (B)</p> Signup and view all the answers

What type of capital can include a landlord's apartment building?

<p>Residential capital (A)</p> Signup and view all the answers

Which of the following is NOT a category included in GDP calculation?

<p>Community service hours (C)</p> Signup and view all the answers

Which category of GDP accounts for the purchase of business structures and equipment?

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

What does net exports (NX) signify in the context of GDP?

<p>Total exports minus total imports (C)</p> Signup and view all the answers

Which of the following best explains the significance of the phrase 'in a given period of time' related to GDP?

<p>It reflects changes in production over any time frame. (A)</p> Signup and view all the answers

What type of spending is specifically excluded from the consumption component of GDP?

<p>Spending on new housing (C)</p> Signup and view all the answers

What is the primary focus of microeconomics?

<p>Study of how households and firms make decisions (B)</p> Signup and view all the answers

What does Gross Domestic Product (GDP) measure?

<p>Total income of everyone in the economy (B)</p> Signup and view all the answers

In the circular-flow diagram, what assumption is made about households?

<p>They spend all of their income (A)</p> Signup and view all the answers

What is a key characteristic of GDP measurements?

<p>Reflects market value of all final goods and services (B)</p> Signup and view all the answers

How does total income relate to total expenditure in an economy?

<p>Total income must equal total expenditure (D)</p> Signup and view all the answers

What do markets in the circular-flow diagram represent?

<p>Goods and services, and factors of production (B)</p> Signup and view all the answers

Which statement about GDP is incorrect?

<p>GDP is calculated over an indefinite period (A)</p> Signup and view all the answers

In macroeconomics, what phenomena are primarily studied?

<p>Economic growth, inflation, and unemployment (A)</p> Signup and view all the answers

What does nominal GDP represent?

<p>The production of goods and services at current prices (D)</p> Signup and view all the answers

When is nominal GDP equivalent to real GDP?

<p>In the base year (C)</p> Signup and view all the answers

What is the GDP deflator used for?

<p>To convert nominal GDP into real GDP (A)</p> Signup and view all the answers

What defines real GDP?

<p>Production valued at constant prices with a designated base year (D)</p> Signup and view all the answers

What does an increase in the inflation rate indicate?

<p>Rising overall price levels in the economy (A)</p> Signup and view all the answers

How is the inflation rate defined?

<p>The percentage change in a price level measure from one period to another (B)</p> Signup and view all the answers

Which of the following statements is true regarding real GDP's calculation?

<p>Real GDP uses a base year price level for valuation (B)</p> Signup and view all the answers

What does the GDP deflator measure?

<p>The current level of prices relative to a base year (C)</p> Signup and view all the answers

How does a higher GDP per person typically affect life expectancy in a country?

<p>It generally increases life expectancy. (C)</p> Signup and view all the answers

Which of the following is a consequence associated with low GDP per person?

<p>Fewer households with electricity. (B)</p> Signup and view all the answers

Which factor is negatively affected in countries with low GDP per person?

<p>Access to safe drinking water. (A)</p> Signup and view all the answers

What is often fewer in countries that have a low GDP per person?

<p>Teachers per student. (D)</p> Signup and view all the answers

How does low GDP per person impact the use of telecommunication technology?

<p>It results in fewer telephones per household. (D)</p> Signup and view all the answers

What is the average annual growth rate of real GDP in the U.S. since 1965?

<p>3% (B)</p> Signup and view all the answers

Which of the following is NOT a characteristic of a recession?

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

What is the significance of a larger GDP according to the given content?

<p>It indicates a higher standard of living. (D)</p> Signup and view all the answers

Why is GDP considered not a perfect measure of well-being?

<p>It measures only market transactions. (D)</p> Signup and view all the answers

What can interrupt the growth of GDP?

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

Which of the following aspects is included in the definition of GDP?

<p>Total income of the economy (D)</p> Signup and view all the answers

Real GDP in the U.S. economy in 2015 was how much more than its 1965 level?

<p>Four times as much (B)</p> Signup and view all the answers

Which of the following statements about GDP is true?

<p>It represents market activities only. (D)</p> Signup and view all the answers

Flashcards

GDP

The total income of everyone in an economy, measured by the total expenditure on goods and services.

Circular-flow diagram

A model that shows how households and firms interact in the goods and services market and the factor market.

Microeconomics

The study of how individual households and firms make decisions and interact in markets.

Macroeconomics

The study of the behavior and performance of the aggregate economy.

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Gross Domestic Product (GDP)

The market value of all final goods and services produced within a country in a given period of time.

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Final Goods and Services

Goods and services purchased by their final users.

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Market Value

The price at which goods and services are sold in a market.

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Income equals expenditure

In an entire economy, the total income earned must equal the total amount spent.

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GDP Measurement Criteria

GDP includes the value of all legally produced and sold goods and services within a country during a specific period (e.g., a year or quarter). It excludes illegal activities and items produced and consumed at home.

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GDP: Final goods

The value of intermediate goods is already considered in the price of final goods when calculating GDP.

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GDP components

GDP is the sum of consumption (C), investment (I), government purchases (G), and net exports (NX).

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Consumption (C)

Spending by households on goods and services (e.g., durable goods, nondurable goods, and services). New housing purchases are excluded.

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Investment (I)

It would be part of GDP calculation. (Not explicitly defined in the text provided)

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Government Purchases (G)

Spending by the government on goods and services. (Not explicitly defined in the text provided)

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Net Exports (NX)

Exports minus imports. (Not explicitly defined in the text provided)

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GDP's Time Period

GDP is calculated over a specific period, typically a year or a quarter. (Not explicitly defined in the text provided)

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Exports

Foreign spending on domestically produced goods and services.

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Imports

Domestic spending on foreign-produced goods and services.

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Business Capital

Capital goods owned by businesses, crucial for production.

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Residential Capital

Structures used for housing (e.g. apartments, personal residences).

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Inventory Accumulation

Increase in unsold goods held by businesses.

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GDP and Life Expectancy

Countries with higher GDP per capita tend to have longer life expectancies.

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GDP and Literacy

Higher GDP per capita is associated with higher literacy rates.

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GDP and Infant Mortality

Countries with low GDP per capita often have higher rates of infant mortality.

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GDP and Malnutrition

Nations with low GDP per capita have higher rates of child malnutrition.

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GDP and School Attendance

Countries with low GDP per capita often have lower school attendance rates.

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Nominal GDP

Total production of goods and services valued at current prices.

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Real GDP

Total production of goods and services valued at constant prices.

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GDP Deflator

Ratio of nominal GDP to real GDP, multiplied by 100.

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Base Year

Year used as a reference for calculating real GDP and the GDP deflator.

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Inflation

Increase in the overall price level of goods and services.

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Inflation rate

Percentage change in the price level from one period to the next.

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Real vs. Nominal GDP

Real GDP adjusts for inflation, while nominal GDP does not.

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Output of goods and services

The total amount of goods and services produced in an economy.

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Recession

A period of significant decline in economic activity, characterized by two consecutive quarters of falling GDP.

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What happens during a recession?

During a recession, real GDP declines, leading to lower income, rising unemployment, falling profits, and increased bankruptcies.

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What does GDP measure?

GDP measures the total income and expenditure of an economy. It reflects the overall economic wellbeing of a society.

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What is GDP good for?

A higher GDP indicates a stronger economy, potentially leading to better healthcare, education, and overall quality of life.

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What is GDP NOT good for?

GDP doesn't account for factors like leisure, non-market activities, environmental quality, or income distribution.

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How is GDP calculated?

GDP is calculated by adding up the value of all final goods and services produced within a country, measured by their market prices.

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Why is GDP growth NOT steady?

GDP growth is often interrupted by recessions, which are periods of economic decline.

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Study Notes

Introduction to Economics

  • Microeconomics studies how households and firms make decisions and interact in markets.
  • Macroeconomics studies economy-wide phenomena, including inflation, unemployment, and economic growth.

Measuring a Nation's Income

  • Gross Domestic Product (GDP) measures the total income of everyone in the economy and the total expenditure on the economy's output of goods and services.
  • For a whole economy, income must equal expenditure.

Circular-Flow Diagram

  • The circular-flow diagram simplifies the economy, assuming markets for goods and services and factors of production, households (spending all income, buying all goods and services) and firms (paying wages, rent, profit to resource owners).

Measurement of GDP

  • GDP is the market value of all final goods and services produced within a country in a given period of time.

  • Market prices reflect the value of goods.

  • GDP includes all items produced and sold legally in markets, excluding items produced and sold illicitly or made and consumed at home.

  • Includes tangible goods and intangible services.

  • Includes goods and services currently produced.

  • Focuses on domestically produced goods, regardless of the producer's nationality.

  • Measured over a year or quarter.

Components of GDP

  • Identity: Y = C + I + G + NX
    • Y = GDP
    • C = consumption
    • I = investment
    • G = government purchases
    • NX = net exports

Consumption (C)

  • Spending by households on goods and services.
  • Includes durable goods (e.g., cars), nondurable goods (e.g., food), and services (e.g., education).
  • Excludes purchases of new housing.

Investment (I)

  • Purchase of (capital) goods that will be used to produce other goods and services in the future.
  • Includes business capital (structures, equipment, intellectual property), residential capital (landlord's apartments, homeowners' residences), and inventory accumulation.

Government Purchases (G)

  • Government consumption expenditure and gross investment.
  • Spending on goods and services by local, state, and federal governments.
  • Does not include transfer payments.

Net Exports (NX)

  • Exports – Imports
    • Exports: Spending on domestically produced goods by foreigners
    • Imports: Spending on foreign goods by domestic residents.

2015 U.S. GDP Data

  • U.S. GDP in 2015: almost $18 trillion.
  • GDP per person: $55,822.
  • Consumption: $38,218 per person (68% of GDP).
  • Investment: $9,402 per person.
  • Government purchases: $9,919 per person.
  • Net exports: -$1,657 per person (Americans spent more on foreign goods than foreigners spent on American goods).

Real vs. Nominal GDP

  • Nominal GDP measures production of goods and services at current prices.

  • Real GDP measures production of goods and services at constant prices (a base year is chosen).

  • Real GDP is not affected by changes in prices, while nominal GDP is.

  • For the base year, Nominal GDP = Real GDP.

  • GDP Deflator = (Nominal GDP / Real GDP) * 100. It measures the current level of prices relative to the base year. It can be used to take inflation out of nominal GDP.

Inflation

  • Inflation is a rise in the economy's overall price level.
  • Inflation Rate = [(GDP Deflator in Year 2 - GDP Deflator in Year 1)/GDP Deflator in Year 1] * 100

A Half Century of Real GDP

  • Real GDP grows over time.
  • The real GDP of the U.S. economy in 2015 was more than four times its 1965 level.
  • Average growth has been about 3% since 1965, though not steady, with interruptions from recessions.

Recession

  • A recession is a period of two consecutive quarters of falling real GDP.
  • Recessions are marked by lower incomes, rising unemployment, falling profits, and increased bankruptcies.

GDP and Quality of Life

  • Although GDP is a measure of economic well-being, it does not perfectly capture quality of life.
  • GDP doesn't include leisure, the value of activities outside markets, or the quality of the environment.
  • It also doesn't account for income distribution.
  • Rich countries tend to have higher GDP per person and better life expectancy, literacy, and internet usage than poor countries. However, poor countries may have other challenges.

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