Ch. 26 (GDP)

What has been the average growth rate of real GDP over the past 60+ years?

3.4%

What is a final vs. intermediate good? Provide an example of each. Explain why only final goods are included in the calculation of GDP.

A final good is a good that is intended to be used by a consumer, like beer. An intermediate good is a good that is used in the process of making another good, like hops. Only final goods are included in GDP because it accounts for all the intermediate goods without doubling up.

What is a recession?

A significant widespread decline in economic activity spread across the economy, lasting for more than a few months

Why is it difficult to determine when a recession starts? Ends?

Because it is a trend that has no clear start or end point. Nobody says, 'Hey, a recession has just started"

Explain why GDP is a measure of production.

Because it measures new and final goods that are sold. Anything that is not produced in the time period is not counted, so therefore it only measures production.

What are the 4 components of the National Spending Approach to measuring GDP?

Consumption Spending (C)- private household spending on goods and services, largest share of GDP Investment Spending (I)- private spending on tools, plant, and equipment used to produce future output. Also includes purchases of new homes, and inventories (unsold produced goods) Government Spending (G)- spending by all levels of gov. on final goods and services. Does NOT include gov. transfers like SS Net Exports (NX)- the value of exports minus the value of imports

Is GDP measured in terms of units or dollars?

Dollars

What goods are included in the calculation of GDP? What goods are not included in the calculation of GDP?

Final goods and services that are currently produced within the country's borders

What is the difference between microeconomics and macroeconomics?

Microeconomics focused on the individual (person, household, firm) and their choices when participating in a market. Macroeconomics focuses on the economy as a whole

Define real GDP per capita and explain how it is calculated?

Real GDP Per Capita is the main indicator of the average person's standard of living Real GDP per capita=(Real GDP)/Population

Which measure - real or nominal GDP - is best for comparing GDP over time? Why?

Real GDP is best for comparing over time because it takes inflation out of the equation. It is only taking production change into account

What is a government transfer? Why aren't government transfers included in government spending?

Things like social security and unemployment. They aren't included in government spending because those funds will be used eventually to buy foods and participate in the consumer spending market

What are the 4 types of income in the Factor Income Approach?

Wages- income to workers Rent- income to landowner Interest- income to the owners of capital Profit- income to business owners

Give several reasons why the GDP may overstate the standard of living within an economy.

○ The environment; GDP does not subtract the value of "bads" § Pollution § Depletion of resources § Loss of animal or plant species § Crime ○ The distribution of income--High average GDP per capita does not mean that everyone is well off

Explain why this approach to calculating GDP is equivalent to the national expenditure approach to calculating GDP.

Every dollar that is spent is income to someone

What is the difference between GDP and the GDP growth rate? How is the GDP growth rate calculated?

GDP growth rate is how fast a country's production is rising or falling over a period of time It's calculated by (End GDP-Start GDP)/(Start GDP) x 100 = GDP growth rate

What is the difference between GDP and GNP? Give an example of something that is included in the calculation of GDP, but is not included in the calculation of GNP, and vice versa.

GDP is everything produced within a country's borders. GNP is everything produced by a country's resident or firm, no matter where. A Ford produced in Mexico would not count in GDP but would count in GNP. A Honda produced in America would count in GDP but not in GNP.

How often is GDP reported? Which U.S. government agency reports the value of GDP?

GDP is reported by the Bureau of Economic Analysis every quarter or year

Why is new housing included in investment spending and not consumption spending?

New housing is considered investment spending because the house will give housing services in the future. It can be rented out for x dollars a month in the future.

What is the difference between nominal and real GDP?

Nominal GDP does not take inflation into account. Real GDP takes inflation into account by using constant prices.

What is the relationship between nominal and real GDP in the base year?

Nominal and Real GDP are always equal at base year

What economic variables decline during a recession?

Production, consumer buying, real GDP, real income

Roughly, how large is the U.S. economy as measured by GDP? In terms of GDP, where does the United States' economy rank in the world?

The US's GDP is 18 trillion and is number one in the world

What is a business cycle?

The short run movements in real GDP around its long term trend

Give several reasons why the GDP may understate the standard of living within an economy.

○ Non-market activity, such as the child care a parent provides his or her child at home ○ Production that takes place in the underground economy, such as narcotics or under the table payment jobs like babysitting ○ Leisure time- informal recreational activities that produce entertainment value are not counted in GDP