Measuring Economic Activity and GDP

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Questions and Answers

How does increased productivity typically influence the economy?

  • Increased average wages and potential for higher living standards. (correct)
  • Falling exports because domestic goods become more expensive.
  • Decreased overall demand for goods and services.
  • Higher unemployment rates due to automation.

Which scenario best describes the composition of the labor force?

  • Employed individuals and unemployed people who are actively seeking work. (correct)
  • Excluding contract workers and including only permanent employees.
  • All adults who are not institutionalized.
  • Including only those employed full-time and excluding part-time workers.

What broader economic condition is most likely indicated by a rising unemployment rate?

  • Increase in overall productivity and output.
  • Widespread wage increases across all sectors.
  • Decline in the prices of consumer goods and services.
  • Fewer available jobs and a potential economic slowdown. (correct)

Following an economic trough, which phase of the business cycle is next?

<p>Expansion, marked by increasing economic activity. (C)</p> Signup and view all the answers

What types of unemployment are accounted for in the natural rate of unemployment?

<p>Frictional unemployment from job transitions and structural unemployment from skills mismatches. (D)</p> Signup and view all the answers

What does it mean for an economy when its GDP is significantly below its potential output?

<p>Resources are not being fully utilized, signaling inefficiency. (A)</p> Signup and view all the answers

What conditions typically define a state of full employment in an economy?

<p>Only frictional and structural unemployment exist without cyclical unemployment. (B)</p> Signup and view all the answers

What is the term for when a country's GDP decreases for two consecutive quarters?

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

Which indicator is most reliable for assessing the actual growth of an economy?

<p>Real GDP growth, adjusted for inflation. (C)</p> Signup and view all the answers

What is a key reason why inflation is considered a significant economic problem?

<p>It erodes the purchasing power of money. (D)</p> Signup and view all the answers

Which of the following transactions is included when calculating GDP?

<p>The purchase of a new laptop by a business for its employees. (B)</p> Signup and view all the answers

According to the expenditure approach, which component of GDP is calculated as the residual after accounting for consumption, investment, and government purchases?

<p>Net exports (C)</p> Signup and view all the answers

A family decides to purchase a newly built house. In which component of GDP would this transaction be included?

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

How would a significant decrease in business inventories likely impact GDP, assuming other factors remain constant?

<p>GDP would decrease because it indicates lower production levels. (A)</p> Signup and view all the answers

How does adjusting nominal GDP to derive real GDP affect our understanding of economic growth?

<p>Real GDP isolates the impact of quantity changes, providing a clearer picture of actual economic growth. (D)</p> Signup and view all the answers

Which of the following scenarios highlights a significant limitation of using GDP as the sole measure of a nation's well-being?

<p>A country's GDP growth is primarily driven by increased defense spending during a prolonged conflict. (C)</p> Signup and view all the answers

If nominal GDP increases by 8% and the price level, as measured by a broad price index, increases by 3%, what is the approximate percentage change in real GDP?

<p>5% (B)</p> Signup and view all the answers

How does Gross National Product (GNP) differ from Gross Domestic Product (GDP) in measuring a country's economic output?

<p>GNP includes the income earned by a country's citizens and businesses, no matter where they are located. (B)</p> Signup and view all the answers

Which of the following scenarios would most likely lead to a decrease in a country's GDP, assuming all other factors remain constant?

<p>A sharp increase in imports with no corresponding increase in exports. (C)</p> Signup and view all the answers

A country's exports are $500 billion and its imports are $600 billion. Based on this information, what is the value of net exports, and how does it impact GDP?

<p>Net exports are -$100 billion, decreasing GDP. (C)</p> Signup and view all the answers

Flashcards

GDP Definition

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

Final Goods and Services

Goods and services purchased by the final user; included in GDP.

Consumption (in GDP)

Spending by households on goods and services.

Investment (in GDP)

Spending by businesses on capital goods, new homes, and inventories.

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Real GDP

GDP adjusted for inflation; reflects actual quantity of goods and services.

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Nominal GDP

GDP measured in current prices, not adjusted for inflation.

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Gross National Product (GNP)

Output produced by citizens of a country, regardless of location.

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Net Exports

Exports minus imports.

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Government Spending (in GDP)

Spending by government on goods and services.

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Intermediate Goods

Items that are used to produce a final good or service.

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Inflation

The increase in the level of prices of the goods and services that households buy.

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Deflation

A general decline in prices for goods and services, typically associated with a contraction in the supply of money and credit in the economy.

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GDP deflator

A tool used to measure the overall price level of all new, domestically produced final goods and services in an economy in a year.

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Real Wages

The purchasing power of a worker's earnings, adjusted for inflation.

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Cost-of-living Adjustment (COLA)

An adjustment to wages, salaries, and pensions to counteract the effects of inflation.

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Consumer Price Index (CPI)

Measures the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

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Borrower

Someone who has taken out a loan, particularly benefiting when inflation reduces the real value of the money they owe.

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Base Year for CPI

The reference year against which other years are compared in an index number series.

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Higher Production Costs

Occurs when factors that increase the costs of production lead to a rise in prices throughout the economy.

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Expansion

Phase of the business cycle that follows after a trough.

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Study Notes

Measuring Economic Activity and GDP

  • GDP includes final goods and services
  • GDP does not include intermediate goods, household production or illegal transactions
  • Savings is not part of the expenditure approach to GDP
  • Consumption in GDP is exemplified by purchasing groceries
  • An increase in business investment is likely to increase GDP
  • Real GDP adjusts for changes in prices
  • Measuring only tangible goods is not a limitation of GDP as a measure of well-being
  • With nominal GDP growth at 5% and inflation at 3%, real GDP growth is approximately 2%
  • Gross National Product (GNP) measures output produced by citizens of a country, irrespective of location
  • A decrease in government spending would cause GDP to decrease
  • Net exports in GDP refer to exports minus imports
  • Buying company shares is not considered investment in GDP
  • Increased productivity would increase GDP

Bird’s Eye View of the Economy

  • Economic growth typically results in higher living standards
  • The labor force includes employed and unemployed people actively seeking work
  • A rise in the unemployment rate usually means fewer people are working
  • Expansion is the phase of the business cycle that follows a trough
  • The natural rate of unemployment includes frictional and structural unemployment
  • When GDP is below potential output, the economy is underperforming
  • Only frictional and structural unemployment exist in a situation that indicates full employment
  • If GDP growth is negative for two quarters, this is called a recession
  • Real GDP growth is an indicator of economic performance

Measuring Price Level and Inflation

  • Inflation is a concern because it reduces the value of money
  • Deflation can lead to lower consumer spending
  • The GDP deflator measures overall price changes in the economy
  • Real wages fall when inflation is higher than wage growth
  • A cost-of-living adjustment (COLA) is designed to increase wages with inflation
  • If the CPI is rising quickly, it suggests inflation
  • Borrowers benefit from unexpected inflation
  • The base year for CPI is the year when prices are compared for future years
  • Inflation can result from higher production costs

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