UGBS 204: The Twin Deficit
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Questions and Answers

What does real GDP measure?

  • Value of economic activity in current prices
  • Actual physical volumes of economic activity (correct)
  • Changes in prices of economic activity
  • Nominal value of economic activity

    • What is nominal GDP?

  • GDP measured in constant prices
  • GDP measured in constant quantities
  • GDP measured in physical quantities
  • GDP measured in current prices (correct)

    • What is the difference between nominal and real GDP?

  • Total economic activity
  • Value of economic activity in current prices
  • Changes in prices of economic activity (correct)
  • Physical quantities of economic activity

    • What do we compare in the example of Kelewele and Pure water?

    <p>GDP between 2010 and 2014</p> Signup and view all the answers

    What is the growth rate of nominal GDP between 2010 and 2014?

    <p>80%</p> Signup and view all the answers

    What is the price of Kelewele in 2014?

    <p>GHC 10</p> Signup and view all the answers

    What is the quantity of Pure water in 2014?

    <p>60</p> Signup and view all the answers

    What is the total value of GDP in 2014?

    <p>GHC 320</p> Signup and view all the answers

    What is the effect of private savings equaling private investment on the current account?

    <p>It equals the government budget deficit</p> Signup and view all the answers

    What represents the twin deficit in the given equation?

    <p>S - I = CA - (T - G)</p> Signup and view all the answers

    What is the result of a government running a budget deficit without excess savings from the private sector?

    <p>Current account deficit</p> Signup and view all the answers

    How is GDP per capita typically calculated?

    <p>GDP / population</p> Signup and view all the answers

    What does GDP calculate?

    <p>The level of economic activity within an economy</p> Signup and view all the answers

    What is the current status of Ghana's economy?

    <p>Lower middle income country</p> Signup and view all the answers

    What is the equation S - I = CA - (T - G) describing?

    <p>The twin deficit</p> Signup and view all the answers

    What is a common interpretation of a higher GDP per capita?

    <p>A higher ability to meet basic needs and more</p> Signup and view all the answers

    What is the current account affected by?

    <p>The excess of private savings over private investment</p> Signup and view all the answers

    What is a limitation of using GDP as a measure of economic wellbeing?

    <p>It does not account for distributional issues</p> Signup and view all the answers

    What is an example of a non-welfare element that adds to GDP?

    <p>High military spending</p> Signup and view all the answers

    What is the purpose of calculating GDP per capita?

    <p>To measure the economic performance over time</p> Signup and view all the answers

    What is an issue with using GDP as a measure of economic wellbeing if only one person owns all the economic resources?

    <p>It does not account for the distribution of income</p> Signup and view all the answers

    Why might GDP not accurately reflect the standard of living in a country?

    <p>Because it includes non-welfare elements, such as high military spending</p> Signup and view all the answers

    What is the main goal of fiscal policy?

    <p>To influence the level of economic activity</p> Signup and view all the answers

    What does the reading of the budget statement represent?

    <p>An announcement of government fiscal policy</p> Signup and view all the answers

    What are the two types of fiscal policy?

    <p>Expansionary and contractionary policy</p> Signup and view all the answers

    What is the primary tool used in fiscal policy?

    <p>Government spending and/or taxes</p> Signup and view all the answers

    What is the role of government in fiscal policy?

    <p>To influence the level of economic activity</p> Signup and view all the answers

    What is the impact of fiscal policy on the economy?

    <p>It influences the level of economic activity</p> Signup and view all the answers

    What is the primary objective of fiscal policy?

    <p>To influence the level of economic activity</p> Signup and view all the answers

    What does fiscal policy involve?

    <p>Changes in government spending and/or taxes</p> Signup and view all the answers

    What does economic growth relate to?

    <p>Long-term changes in real GDP</p> Signup and view all the answers

    What can economic growth be defined as?

    <p>Expansion of the country’s potential GDP</p> Signup and view all the answers

    What is economic growth in terms of production?

    <p>Sustained expansion in the production of goods and services</p> Signup and view all the answers

    What is the time frame of economic growth?

    <p>Long-term</p> Signup and view all the answers

    What is economic growth related to?

    <p>National output</p> Signup and view all the answers

    What is economic growth an expansion of?

    <p>The country’s potential GDP</p> Signup and view all the answers

    What is the nature of economic growth?

    <p>Sustained and long-term</p> Signup and view all the answers

    What is the result of economic growth?

    <p>Increased production of goods and services</p> Signup and view all the answers

    Study Notes

    The Twin Deficit

    • The equation S - I = CA - (T - G) states that the excess of private savings over private investment finances the current account and the government budget deficit.
    • If private savings equal private investment, then the current account equals the government budget deficit, i.e., T - G = CA.

    Economic Performance Over Time

    • GDP per capita (per capita income) is calculated as GDP / population.
    • Ghana is now a lower middle-income country.

    Economic Activity or Economic Wellbeing?

    • GDP calculates the level of economic activity within an economy.
    • Some use GDP as a measure of economic wellbeing, as higher GDP per capita means higher income and the ability to meet basic needs.
    • However, there are limitations to using GDP as a measure of economic wellbeing, including:
      • Distributional issues: GDP does not account for income inequality, e.g., if only the president owns all the economic resources.
      • Non-welfare elements: high military spending may increase GDP but does not improve standard of living.

    Real vs Nominal GDP

    • Real GDP measures actual physical volumes of economic activity, excluding changes in prices.
    • Nominal GDP is the cedi value of all economic activity, including changes in both physical quantities and prices.
    • The difference between the growth of nominal and real GDP is solely due to changes in prices.

    Meaning of Economic Growth

    • Economic growth relates to long-term changes in real GDP.
    • It can be defined as the expansion of a country's potential GDP or national output.
    • It is a sustained expansion in the production of goods and services in an economy over time.

    Fiscal Policy

    • Fiscal policy refers to changes in the level of government spending and/or taxes meant to influence the level of economic activity.
    • Reading of the budget statement is an announcement of government fiscal policy.
    • Fiscal policy may be expansionary or contractionary.

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    Description

    This quiz covers the concept of the Twin Deficit in economics, specifically the relationship between private savings, private investment, current account, and government budget deficit.

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