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Methods to Measure GDP
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Methods to Measure GDP

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Questions and Answers

What effect does a rise in U.S. interest rates have on the Canadian dollar?

  • It increases the value of the Canadian dollar.
  • It leads to an increase in Canadian export volumes.
  • It decreases the demand for Canadian investments. (correct)
  • It stabilizes the exchange rate between Canada and the U.S.

    • What action can the Bank of Canada take to counteract a decrease in the value of the Canadian dollar?

  • Encourage foreign investment through tax cuts.
  • Reduce fiscal spending.
  • Increase short-term interest rates. (correct)
  • Lower tariffs on imports.

    • How does a credible commitment to low inflation affect interest rates in Canada?

  • It enables lower interest rates over time. (correct)
  • It has no significant impact on interest rates.
  • It causes interest rates to rise sharply.
  • It leads to unchanged interest rates.

    • What is one negative consequence of higher interest rates on economic growth?

    <p>They discourage business investments.</p> Signup and view all the answers

    What generally happens to lenders' interest rates when inflation is expected to rise?

    <p>Lenders increase interest rates to offset inflation.</p> Signup and view all the answers

    What role do central banks, like the Bank of Canada, play in economic stability?

    <p>They influence short-term interest rates to stabilize the economy.</p> Signup and view all the answers

    What is the primary responsibility of the Bank of Canada concerning inflation?

    <p>To keep inflation low and stable.</p> Signup and view all the answers

    When Canadian investors choose to invest in U.S. securities, what is the immediate effect on Canadian dollars?

    <p>The supply of Canadian dollars increases.</p> Signup and view all the answers

    What is a potential outcome of sustained low interest rates on the economy?

    <p>They might lead to excessive borrowing and inflation.</p> Signup and view all the answers

    Which of the following is a consequence of maintaining a strong commitment to low inflation?

    <p>Inflation expectations decrease.</p> Signup and view all the answers

    What does the production approach to measuring GDP primarily focus on?

    <p>Value added by various industries</p> Signup and view all the answers

    In the expenditure approach formula, which component represents the spending by businesses?

    <p>I</p> Signup and view all the answers

    Which of the following best describes the income approach to measuring GDP?

    <p>It equates total spending to total income generated by the economy.</p> Signup and view all the answers

    What is represented by the 'X - M' component in the expenditure approach formula for GDP?

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

    Which of the following is NOT accounted for in the expenditure approach to GDP?

    <p>Savings</p> Signup and view all the answers

    If the computer industry produces $5 billion worth of computers and incurs $2 billion in production costs, how much value is added to GDP by this industry?

    <p>$3 billion</p> Signup and view all the answers

    Which method of measuring GDP is primarily focused on consumer behavior?

    <p>Expenditure approach</p> Signup and view all the answers

    What role do imports play in calculating GDP using the expenditure approach?

    <p>They are subtracted from total exports.</p> Signup and view all the answers

    Which of the following approaches would likely yield similar GDP results when correctly applied?

    <p>All three approaches</p> Signup and view all the answers

    What is one potential economic consequence of sustained falling prices?

    <p>Rising unemployment rates</p> Signup and view all the answers

    What primarily characterizes stagflation?

    <p>High inflation coupled with declining economic growth</p> Signup and view all the answers

    Which economic period is frequently cited as an example of stagflation?

    <p>1972 to 1982</p> Signup and view all the answers

    In which scenario is hyperinflation typically observed?

    <p>Underdeveloped economies with extremely high inflation</p> Signup and view all the answers

    How does declining corporate profits impact stock prices?

    <p>It negatively affects stock prices</p> Signup and view all the answers

    What inflation rate defines hyperinflation?

    <p>Greater than 50% per month</p> Signup and view all the answers

    What nominal rate of return is required to achieve a real rate of return of 6% with an expected inflation rate of 3%?

    <p>9%</p> Signup and view all the answers

    Under negative interest rates, what unusual situation can occur regarding loan repayments?

    <p>Borrowers only repay a discounted amount at maturity.</p> Signup and view all the answers

    What is a potential effect of central banks pushing interest rates into negative territory?

    <p>Stimulus of economic growth through increased lending.</p> Signup and view all the answers

    Prior to 2020, where were negative interest rates predominantly observed?

    <p>Some EU countries and Japan</p> Signup and view all the answers

    What is the Fisher Equation primarily used to calculate?

    <p>The real interest rate</p> Signup and view all the answers

    Which situation describes a negative interest rate?

    <p>Clients are charged for storing their savings.</p> Signup and view all the answers

    What occurs when the interest rates on borrowed funds drop below zero?

    <p>Borrowers are incentivized to take loans.</p> Signup and view all the answers

    Which central bank action typically leads to negative interest rates?

    <p>Implementing aggressive monetary stimulus.</p> Signup and view all the answers

    What happens in both U.S. and Canadian economies when negative interest rates are implemented?

    <p>Economic growth is stimulated.</p> Signup and view all the answers

    What is typically a consequence of banks storing deposits with a central bank during a negative interest rate environment?

    <p>Decreased competition for loans.</p> Signup and view all the answers

    What is the formula used to calculate the participation rate?

    <p>Participation Rate = Labour Force / Working Age Population × 100</p> Signup and view all the answers

    If a country has a labour force of 30 million and 2 million are unemployed but actively seeking work, what is the unemployment rate?

    <p>6.67%</p> Signup and view all the answers

    What demographic factor has significantly contributed to the increase in Canada’s participation rate since the 1960s?

    <p>Increase in women’s workforce participation</p> Signup and view all the answers

    What statistically represents a key measure of societal productivity?

    <p>Participation Rate</p> Signup and view all the answers

    In the given scenario, if 5 million are not working and not actively looking for work, what can be inferred about these individuals?

    <p>They potentially include students and discouraged workers</p> Signup and view all the answers

    What trend does the annual Canadian unemployment rate correspond to, according to the content?

    <p>Strong correlation with business cycle fluctuations</p> Signup and view all the answers

    How does a 50% participation rate compare to a 70% participation rate in terms of societal productivity?

    <p>A 70% participation rate indicates higher productivity</p> Signup and view all the answers

    If a country has 25 million people of working age and 19 million are working, how many are part of the labour force?

    <p>20 million</p> Signup and view all the answers

    What is the average participation rate for Canada over the past decade?

    <p>65.5%</p> Signup and view all the answers

    Which of the following statements is true regarding not working but actively looking for work?

    <p>They are included in the labour force</p> Signup and view all the answers

    Study Notes

    Methods to Measure GDP

    • Three accepted methods: expenditure approach, income approach, and production approach.
    • All methods aim to estimate the monetary value of final goods and services produced in an economy.

    Expenditure Approach

    • Calculates GDP by summing all expenditures: consumer spending, business investments, government spending, exports, and imports.
    • Formula: GDP = C + I + G + (X - M)
      • C = consumer expenditures
      • I = business spending/investment
      • G = government spending
      • X - M = exports minus imports

    Income Approach

    • Based on the principle that total spending equals total income generated.
    • Adds up all incomes produced from goods and services to determine GDP.

    Production Approach

    • Known as the value-added approach, it measures industry outputs and subtracts the costs of inputs.
    • For instance, producing $5 billion in computers while spending $2 billion means adding $3 billion to GDP.

    Labour Force Participation Rate

    • Calculated as: (Labour Force ÷ Working Age Population) × 100.
    • Example calculation shows participation rate of 80% with 25 million working-age individuals and 20 million in the labour force.

    Unemployment Rate

    • Defined as the share of the labour force that is unemployed and actively seeking work.
    • Calculated as: (Unemployed ÷ Labour Force) × 100.
    • Example calculation indicates a 5% unemployment rate.

    Canadian Context

    • Participation rate has increased since the 1960s, especially due to more women entering the workforce.
    • Recent Canadian participation rate averages around 65.5%.
    • A higher participation rate indicates better societal productivity.

    Influence of Foreign Interest Rates

    • Foreign rates impact Canadian interest rates due to an open economy.
    • Rising U.S. interest rates can decrease the value of the Canadian dollar as investors seek better returns in the U.S.

    Central Bank Influence

    • Central banks, including the Bank of Canada, adjust interest rates to stabilize the economy.
    • Higher interest rates can slow economic growth, while lower rates may encourage borrowing and spending.

    Inflation and Interest Rates

    • Lenders raise rates when inflation is expected to protect purchasing power.
    • The Bank of Canada aims to maintain low, stable inflation to foster economic growth.

    Negative Interest Rates

    • Occurs when loan interest rates drop below zero; banks may charge to hold deposits or offer loans without interest payments.
    • Typically a measure of extreme monetary policy to stimulate the economy.

    Economic Scenarios of Inflation

    • Stagflation: high inflation with slow economic growth, as seen in the 1970s due to oil embargoes.
    • Hyperinflation: extreme inflation exceeding 50% per month, rare and often linked to economic crises in underdeveloped regions, like Venezuela.

    Interest Rates and Economic Impact

    • Higher interest rates generally hinder economic growth, while lower rates can promote it.
    • Real interest rates are calculated by subtracting inflation from nominal rates, affecting investment strategies.

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    Description

    This quiz explores the three primary methods used to measure GDP: the expenditure approach, income approach, and production approach. Each method highlights different aspects of economic activity and culminates in the estimation of the monetary value of goods and services produced in an economy. Assess your understanding of these concepts and their applications.

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