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Questions and Answers
What is the primary reason for calculating GDP?
What is the primary reason for calculating GDP?
- To calculate the market value of intermediate goods
- To measure the performance of a country's economy during a specified period (correct)
- To compare the economy with other countries
- To forecast future inflation rates
What is an intermediate good?
What is an intermediate good?
- A good that is purchased to be used as inputs in producing other goods (correct)
- A good that is not produced within the country's borders
- A good that is sold in the international market
- A good that is used or consumed by individuals, households, and firms
Why is double counting avoided in GDP calculation?
Why is double counting avoided in GDP calculation?
- To exclude intermediate goods from the calculation
- To avoid counting the same good multiple times (correct)
- To reduce the GDP value
- To include only final goods in the calculation
What is the typical time period for GDP calculation?
What is the typical time period for GDP calculation?
Why is GDP important for businesses?
Why is GDP important for businesses?
What is one of the political implications of economic performance?
What is one of the political implications of economic performance?
What is used to compare the aggregate market size of different countries?
What is used to compare the aggregate market size of different countries?
What is the geographic area within which goods and services are produced?
What is the geographic area within which goods and services are produced?
What is the primary purpose of calculating GDP using different methods?
What is the primary purpose of calculating GDP using different methods?
What is the difference between GDP and GNP?
What is the difference between GDP and GNP?
What is the purpose of calculating real GDP?
What is the purpose of calculating real GDP?
What is the Net Domestic Product (NDP)?
What is the Net Domestic Product (NDP)?
Why is it important to distinguish between nominal GDP and real GDP?
Why is it important to distinguish between nominal GDP and real GDP?
What is the significance of the base year in real GDP calculations?
What is the significance of the base year in real GDP calculations?
Why are the three methods of calculating GDP important?
Why are the three methods of calculating GDP important?
What is the relationship between GDP and the circular flow?
What is the relationship between GDP and the circular flow?
What is the purpose of calculating the net factor payments to the rest of the world?
What is the purpose of calculating the net factor payments to the rest of the world?
Why is GNP considered a better measure of the income or standard of living of citizens of a country?
Why is GNP considered a better measure of the income or standard of living of citizens of a country?
What is one of the limitations of GDP in measuring non-market production?
What is one of the limitations of GDP in measuring non-market production?
What is an example of unrecorded activity?
What is an example of unrecorded activity?
Why are GDP estimates frequently revised?
Why are GDP estimates frequently revised?
What is a criticism of using GDP as a measure of economic welfare?
What is a criticism of using GDP as a measure of economic welfare?
What is an example of a negative externality?
What is an example of a negative externality?
Why is it difficult to compare the value of different types of government expenditure?
Why is it difficult to compare the value of different types of government expenditure?
What is a limitation of GDP in measuring economic growth?
What is a limitation of GDP in measuring economic growth?
Why is farmer's consumption of their own produce an example of non-market production?
Why is farmer's consumption of their own produce an example of non-market production?
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Study Notes
Macroeconomic Instruments
- Macroeconomic instruments are used to assess the state of an economy and compare economic growth and development with other economies.
Gross Domestic Product (GDP)
- GDP measures the performance of a country's economy during a specified period.
- GDP is the total market value of final goods and services produced in an economy during a specific period of time (normally a year).
Defining GDP
- Market Value: refers to the market price of the various new goods and services produced in the specified time period.
- Final goods and services: used or consumed by individuals, households, and firms (excluding intermediate goods).
- Economy: refers to the geographic area (country borders) within which all the goods and services are produced.
- Specific time period: normally a year or quarter during which only new goods and services are produced.
Importance of GDP to Businesses
- Forecasts for future aggregate demand are usually expressed in terms of projected growth in GDP.
- Assessments of the current state of the economy are based on the current and recent past level of GDP.
- Economic performance has political and policy implications.
- International comparisons of aggregate market size are based on GDP data.
Methods for Calculating GDP
- Production Method (value added): adds up the value added at each phase of production.
- Expenditure Method (final goods and services): adds up the value of all transactions once they have reached their final destination.
- Income Method (incomes of the factors of production): adds up the income earned by households for the factors of production.
Gross National Product (GNP)
- GNP refers to the production resulting from the employment of the permanent residents of a country wherever they might be.
- GNP is derived by subtracting the factor incomes of foreigners earned by foreigners in the country from the factor income of permanent residents earned abroad.
Net Domestic Product (NDP)
- NDP = GDP - depreciation, making allowance for the depreciation of assets.
Nominal vs Real GDP
- Nominal GDP: compares the current GDP value with that of previous years.
- Real GDP: expresses the GDP at constant prices, reflecting the true picture of a country's well-being.
Limitations of GDP
- Non-market production: difficult to measure or estimate the value of activities not traded in a market.
- Unrecorded activity: many transactions or activities are never recorded, including illegal activities and those that escape the tax net.
- Data revision: original estimates are frequently adjusted as new and better data become available.
- Economic Welfare: GDP does not consider unwanted by-products or negative externalities, and does not account for productivity improvements and quality of goods and services over time.
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