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Questions and Answers
What is the total expenditure equation in the economy?
What is the total expenditure equation in the economy?
What is the component of GDP that includes the expenditure by households on consumption goods and services?
What is the component of GDP that includes the expenditure by households on consumption goods and services?
What is the income earned by entrepreneurship in the economy?
What is the income earned by entrepreneurship in the economy?
What is the difference between exports and imports of goods and services called?
What is the difference between exports and imports of goods and services called?
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Why is GDP not a perfect measure of standard of living?
Why is GDP not a perfect measure of standard of living?
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What is the component of GDP that includes the purchase of new capital goods and additions to inventories?
What is the component of GDP that includes the purchase of new capital goods and additions to inventories?
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What is the equation to calculate GDP using the income approach?
What is the equation to calculate GDP using the income approach?
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What is the component of GDP that includes the expenditure by all levels of government on goods and services?
What is the component of GDP that includes the expenditure by all levels of government on goods and services?
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What is the difference between nominal GDP and real GDP?
What is the difference between nominal GDP and real GDP?
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What is the main use of GDP as a measure of economic activity?
What is the main use of GDP as a measure of economic activity?
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Study Notes
Measuring Total Production and Income: GDP
- Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country in a given time period.
- GDP is calculated by using market prices to value production.
- Market value of a good or service = price at which the item is traded in the market × its quantity.
GDP, Income, and Expenditure
- GDP includes only those items that are traded in markets (final goods or services).
- Expenditure equals income because firms pay out everything they receive as incomes to the factors of production (Y).
- Y = C + I + G + NX, where Y is total income, C is consumption expenditure, I is investment, G is government expenditure on goods and services, and NX is net exports.
The Circular Flow of Income and Expenditure
- Households' income is the blue flow (Y), which is either saved (green flow S) or consumed (red flow C).
- Y = C + S + NT, where NT is net taxes.
Measuring GDP
- The Expenditure Approach measures GDP by using data on consumption expenditure, investment, government expenditure on goods and services, and net exports.
- The Income Approach measures GDP by summing the incomes that firms pay households for the factors of production they hire.
Components of GDP
- Consumption expenditure is the expenditure by households on consumption goods and services.
- Investment is the purchase of new capital goods and additions to inventories.
- Government expenditure on goods and services is the expenditure by all levels of government on goods and services.
- Net exports of goods and services is the value of exports of goods and services minus the value of imports of goods and services.
Limitations of GDP
- GDP does not include the value of intermediate goods and services.
- GDP does not include the value of financial assets.
- GDP does not account for the value of used goods.
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Description
Test your knowledge on how to measure the total production and income of an economy, including the concept of GDP, its calculation, and the difference between nominal and real GDP. This quiz covers the basics of economic statistics and national income accounting.
