chapter7 econ

What is GDP, and why does it measure economic activity?

Gross Domestic Product (GDP) is the market value of all final goods and services produced within a country during a specified period. Market prices allow different goods and services to be measured in a common monetary unit.

Why does GDP count final goods instead of intermediate goods?

Counting intermediate goods separately from final goods can double-count production. Intermediate goods are inputs used to produce other goods or services. Used goods are also excluded because their production was counted when they were originally made.

What is the GDP formula, GDP = C + I + G + NX?

C = consumption (household spending); I = investment (new capital goods, structures, and inventories); G = government purchases of goods and services; NX = net exports (exports minus imports). Transfer payments are not themselves government purchases of newly produced goods or services.

What are some limitations of GDP as a measure of economic activity?

GDP can miss non-market production, such as unpaid household work, and activity in the underground economy. Counting intermediate goods or used goods incorrectly can overstate GDP. GDP also does not measure every aspect of well-being.

What is the difference between nominal GDP and real GDP?

Nominal GDP measures output using current prices. Real GDP adjusts for price changes to better measure changes in actual production.

How do you calculate real GDP using a price index?

Real value = Nominal value × (Base-year price index ÷ Current-year price index). Example: if nominal GDP is $900 billion and the price index rises from 100 to 150, real GDP in base-year prices is $900 billion × (100 ÷ 150) = $600 billion.

In the Country A example, how did nominal GDP and real GDP change from 2005 to 2015?

Nominal GDP increased from $500 billion to $900 billion, a $400 billion increase or 80%. Real GDP increased from $500 billion to $600 billion in 2005 prices, a $100 billion increase or 20%. The nominal increase was larger because it included rising prices.

How can a paycheck increase while real income decreases?

If prices rise faster than the paycheck, the paycheck buys fewer goods and services. The number of dollars increases, but purchasing power falls.

What is GDP per capita, and why is it useful?

GDP per capita = GDP ÷ Population. It measures output per person and is generally more useful than total GDP when comparing average economic output across countries, although it does not show how income is distributed.

What is the difference between economic growth and economic development?

Economic growth is an increase in output, commonly measured by real GDP. Economic development is a broader improvement in living conditions and well-being, including areas such as health and education. Growth can help development but does not guarantee it.

What is the business cycle, and what are its main phases?

The business cycle is fluctuation in economic activity around its long-term trend. Expansion or boom means activity increases; a peak is the high point; contraction or recession means activity declines; and a trough is the low point before recovery. A depression is generally deeper and longer than a recession.

Are business cycles predictable, and which phase usually lasts longer?

Business cycles vary in timing, length, and severity. Use your course materials for the specific comparison of recession and expansion lengths after World War II.

What is the difference between extensive growth and intensive growth?

Extensive growth comes from using more inputs, such as more workers or land. Intensive growth comes from producing more with existing inputs through improved productivity, technology, skills, or capital. Intensive growth can support sustained increases in output per person.

Can real GDP rise while real GDP per capita falls?

Yes. If population grows faster than real GDP, average real GDP per person can decrease.

What is the vicious-cycle-of-poverty hypothesis?

Poverty can limit saving and investment, which restricts capital accumulation and productivity. Low productivity keeps incomes low, making it difficult to escape poverty.

What are capital flight and brain drain?

Capital flight is the movement of money or investment capital out of a country, often because of instability or insecure property rights. Brain drain is the departure of educated or skilled people, which can reduce the supply of skilled workers.

How do rule of law and expropriation affect economic growth?

The rule of law means laws and rights are applied predictably and contracts are protected. Expropriation is the taking of private property by the government. Weak legal protections and fear of losing property can discourage investment and growth.

What are crony capitalists, and how can government failure reduce growth?

Crony capitalists are businesspeople who benefit from close relationships with government officials rather than primarily from open competition. Corruption, favoritism, poor policies, and weak property rights can misallocate resources, weaken competition, and discourage investment.