1. GDP

flashcards

Microeconomics

The study of how individual households and firms make decisions and how they interact with one another in markets.

Macroeconomics

The study of the economy as a whole, focused on explaining economic changes affecting many households, firms, and markets at once.

Gross Domestic Product (GDP)

A measure of the total production, income, and expenditures of an economy, valued at the market price of all final goods and services produced within a country during a specific period.

Circular-Flow Diagram

A model that illustrates the flow of income and expenditure in an economy, showing the interaction between households and firms.

Consumption (C)

The spending by households on goods and services, excluding purchases of new housing.

Investment (I)

The spending on capital equipment, inventories, and structures, including new housing.

Government Purchases (G)

The spending on goods and services by local and central governments, excluding transfer payments.

Net Exports (NX)

Exports minus imports; a component of GDP.

Nominal GDP

The value of production of goods and services at current prices.

Real GDP

The value of production of goods and services at constant prices, adjusted for inflation.

GDP Deflator

A measure of the price level calculated as the ratio of nominal GDP to real GDP times 100.

GDP per capita

Gross domestic product divided by the population of a country, indicating national income per person.

Economic Well-Being

A measure of the overall economic quality of life experienced by a society, often assessed through GDP.

Transfer Payments

Payments made by the government where no goods or services are exchanged, such as social security.

Final Goods

Goods that are sold to the final consumer, as opposed to intermediate goods used in production.

Intermediate Goods

Goods that are used in the production of final goods and are not counted in GDP to avoid double counting.

Why is average income high in some countries and low in others?

Average income is higher in some countries because of differences in Gross Domestic Product (GDP). GDP measures the total market value of all final goods and services produced within a country during a given time. It reflects the economy's income and expenditure. Countries with higher GDP have more resources and economic activity, leading to higher average incomes. Additionally, GDP per capita, which divides GDP by the population, provides a measure of national income per person, explaining income disparities.

Why do prices rise rapidly in some time periods while they are more stable in others?

Rapid price increases, or inflation, are often caused by:

• Demand-pull inflation: When aggregate demand in the economy outpaces aggregate supply.

• Cost-push inflation: Rising costs of production (e.g., wages, raw materials) are passed on to consumers. Periods of price stability occur when:

• Economic conditions are balanced: Supply and demand are well-matched, and inflation expectations are managed.

• Monetary policies: Effective central bank policies, such as controlling money supply, help stabilize prices.

Why do production and employment expand in some years and contract in others?

Production and employment fluctuate due to economic cycles:

• Expansions: Driven by increased demand, innovation, and investment, leading to growth in production and hiring.

• Recessions: Caused by reduced consumer spending, investment, or external shocks, leading to a decline in production and layoffs. Other contributing factors include government policies, global market conditions, and technological advancements.