GDP: GROSS DOMESTIC PRODUCT
What is the relationship between increases in labour productivity and increases in real GDP per capita?
increase in real GDP increases labour productivity.
What is the most important factor in explaining increases in real GDP in the long run?
increases in labour productivity.
Describe the four main components of expenditures in GDP.
C = consumer expenditures - made by the households for goods and services. I = investment expenditures - made by firms for new plant equipment, buildings, inventories. Also new households for residential construction. G = government purchases - Federal/state/local government purchases of goods and services. NX = net exports = exports - imports. Exports are products (g/s) produced by Australian firms, which are purchased by o/s firms. Imports are products (g/s) produced by o/s firms, which are purchased by Aus firms.
What two factors are most important in determining the level of labour productivity?
1) quantity of capital per hour worked. 2) level of technology.
In the circular flow of expenditure and income, why must the value of total production in an economy equal the value of total income?
Because all the money a business received from the sale of its output must end up as someone's income.
What does GDP equal?
GDP (Y) = C + I + G + NX
Why does the size of a country's GDP matter? How does it affect the quality of life of the country's people?
GDP measures a country's production of goods and services which is equal to income. Aussuming income is a good indicator of QOL, if the amount of g/s went down therefore the income would go down and the QOL would go down.
Why is GDP an imperfect measure of economic well being?
It doesn't include all production (i.e underground economy and household production), doesn't include the value of leisure, not adjusted for negative effects (like pollution and social problems), and doesn't inform us as to how GDP is distributed.
Why does inflation make GDP a poor measure of the increase in total production from one year to the nexT?
Nominal GDP is the market value of final goods and services evaluated at current prices. Nominal GDP can change due to quantity changes or if prices change. Real GDP is a measure of the volume of final goods and services holding prices constant.
What is potential GDP? Does potential GDP = actual GDP?
Potential GDP is the level of GDP if all firms are producing at capacity. It is measured during normal hours under a normal workforce. It is not equal to actual GDP due to business cycle fluctuations. Economic boom = actual GDP > potential GDP. Economic recession = actual GDP < potential GDP.
What supportive government policies are crucial for long run economic growth?
secure rights to private property (also the law enforcing contracts between individuals) and to develop and maintain an efficient financial system.
