ECON 101 - Chapter 4

  1. Define the following terms

    Business cycle

    Expansion

    Recession

    Economic growth

    Inflation rate
    Business cycle The alternating periods of expansion and recession that occur in all economies.

    Expansion  The period of a business cycle during which total production and total employment are increasing.

    Recession  The period of a business cycle during which total production and total employment are decreasing.

    Economic growth  The ability of an economy to produce increasing quantities of goods and services.

    Inflation rate  The percentage increase in the price level from one year to the next.
  2. 1. Define GDP

    2. What two aspects of the economy does GDP measure?

    3. How are they related?

    4. What is excluded from GDP?
    1. the market value of all final goods & services produced within a country in a given period of time.

    2a. Total income of everyone in the economy

    2b. Total expenditure on the economy's output of goods and services (G & S)

    3. For the economy as a whole, income equals expenditure, because every dollar of a buyer is a dollar of income for the seller

    4. Things that don't have a market value, such as housework
  3. 1. What is the difference between final goods and intermediate goods?

    * What is used to calculate GDP and why?
    Final goods are intended for the end user

    Intermediate goods are used as components or ingredients in the production of other goods. 

    * GDP only includes final goods, as they already embody the value of the intermediate goods used in their production
  4. Where and who does GDP measure?
    GDP measures the value of production that occurs within a country’s borders, whether done by its own citizens or by foreigners located there.
  5. What time period does GDP usually measure?
    Usually a year or quarter (3 months)
  6. Define the following: 

    Consumption (C)
    Investment (I)
    Government Spending (G)

    What does I and G not include?
    Consumption: The total spending by households on goods and services

    • ex. durable goods (e.g., automobiles and appliances), and nondurable goods (e.g., food)
    • Spending on intangible services (e.g., medical car

    Investment: The total spending on goods that will be used in the future to produce more goods

    • ex. capital equipment (e.g., machines, tools)
    • structures (factories, office buildings)
    • inventories (goods produced but not yet sold)

    * Investment does not include the purchase of financial assets such as stocks and bonds

    Government Purchases: All spending on G & S purchased by government at federal, provincial and municipal levels

    ex. does not include transfer payments such as UI
  7. 1. What are exports?

    2. What are imports?

    3. What are Net Exports (NX) ?
    1. Exports represent foreign spending on the economy’s g&s 

    2. Imports are the portions of C, I, and G that are spent on g&s produced abroad.

    3. NX = exports – imports
  8. What are all the components added up to make GDP?
    Y = C + I + G + NX
  9. In each of the following cases, determine how much GDP and each of its components is affected (if at all).

    1. Jane spends $1200 on a computer to use in her editing business. She got last year’s model on sale for a great price from a local manufacturer. 

    2. Sarah spends $1800 on a new laptop to use in her publishing business.  The laptop was built in China.
    1. 

    Jane’s purchase causes investment (for her own business) to increase by $1200. However, the computer is sold out of inventory, so inventory investment falls by $1200. The two transactions cancel each other, leaving aggregate investment and GDP unchanged. Note that the computer was built last year. 

    2. Investment rises by $1800, net exports fall by $1800, GDP is unchanged.
  10. What is the difference between Nominal GDP and Real GDP?
    Nominal GDP: The value of final goods and services evaluated at current-year prices.

    Real GDP: The value of final goods and services evaluated at base-year prices. Real GDP is corrected for inflation, whereas nominal GDP is not.
  11. Suppose that a very simple economy produces only the following three final goods and services: energy drinks, pizzas, and textbooks.

    Use the information in the table below to compute real GDP for the year 2014.

    Assume that the base year is 2007.
    How do you calculate this?
    Image Upload 2
    1. Multiply the 2014 quantity of each item by the 2007 price.

    2. Add up the totals of each item to get the real GDP.

    • 100 x $40 = $4000
    • 80 x $11 = $880
    • 20 x $90 = $1800

    $4000 + $880 + $1800 = $6680

    2014 real GDP = $6680

    * 2007 quantities are irrelevant, and are only there to trick you! Don't fall for it!!
  12. 1. What is the GDP deflator and what is it used for?

    2. How is the GDP deflator calculated?

    3. How do you calculate % change in GDP (and any other economic variable for that matter).
    1a. The GDP deflator is a measure of the overall level of prices

    1b. The GDP deflator can be used to measure the economy’s inflation rate by computing the percentage increase in the GDP deflator from one year to the next. 

    2. GDP deflator = (nominal GDP / real GDP) x 100.

    3. % change = [(New number - Original nubmer) ÷ Original number] x 100

    or 

    [(2012 GDP deflator - 2011 GDP deflator) ÷ 2011 GDP deflator] x 100

    Example

    Image Upload 4
  13. What is the main indicator we use to measure the average person's standard of living?
    Real GDP per capita
  14. What are the two shortcomings of GDP as a measure of total production?
    GDP does not measure two types of production: 

    1. Production in the home: goods and services people produce for themselves that are not bought and sold in markets.

    2. Underground economy: Buying and selling of goods and services that are concealed from the government to avoid taxes or regulations or because the goods and services are illegal.
  15. What are the four shortcomings of GDP as a measure of well-being?
    • 1. The Value of Leisure Is Not Included in GDP  If an economics professor decides to retire, GDP will decline even though the professor may value increased leisure more than the income they earned as teaching undergrad economics courses. The
    • professor’s well-being has increased, but GDP has decreased.

    2. GDP Does Not Consider the State of the Environment When you get your clothes cleaned at a dry cleaner, the value of that service is included in GDP. If the chemicals used to clean your shirt pollute the air or water, GDP is not adjusted to compensate for the costs of the pollution. Similarly, the value of cigarettes produced is included in GDP, but the cost of lung cancer that some smokers develop is not included in GDP.

    3. GDP Is Not Adjusted for Changes in Crime and Other Social Problems An increase in crime reduces well-being but may actually increase GDP if it leads to greater spending on police, security guards, and alarm systems.

    4. GDP Measures the Size of the Pie but Not How the Pie Is Divided. GDP may not provide good information about the goods and services consumed by the typical person. In other words, it is not a good indication of the divide between the rich and the poor.
  16. If we are calculating GDP on a quarterly basis, what is the total GDP for 2018 with the following information.
    Q1=4B, Q2=4B, Q3=5B, Q4=5B
    Answer 5B, not 18B

    Considering the information from Q1 and Q2, Q3 estimates that GDP will be 5B for the year if things keep going the way they are. So GDP of Q4 should be the most accurate estimate.
  17. The percentage change in real GDP is also known as what?
    The economic growth rate
  18. In what situation can nominal GDP increase while real GDP falls?
    Nominal GDP can increase if output falls, but prices rise more than the amount of the fallen output.

    Real GDP on the other hand, will fall as output falls because prices are determined at the base year, and not the current year.
Author
MissionMindhack
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345203
Card Set
ECON 101 - Chapter 4
Description
ECON 101 - Chapter 4 - Prep for midterm
Updated