Measuring and monitoring economic growth test review

What is GDP? What does it stand for and what does it measure?

• GDP stands for Gross Domestic Product.

• It measures the total value of all goods and services produced within a country's borders over a specific time period.

Why do we use GDP instead of GNP?

• GDP focuses on domestic production.

• GNP includes income from abroad, which is less relevant for domestic economic analysis.

What are the two kinds of GDP?

• Nominal GDP: Measures total value at current market prices.

• Real GDP: Adjusted for inflation to reflect true value.

What are the three factors that make goods a part of GDP?

• Final goods: Not intermediate goods.

• Produced within the period: Excludes resale items.

• Produced within the country: Regardless of producer's nationality.

How do you calculate GDP? What part of GDP is the highest percentage?

• GDP = C + I + G + (X - M)

  • C = Consumption

  • I = Investment

  • G = Government Spending

  • X - M = Net Exports (Exports - Imports)

• Consumption (C) is typically the largest component.

What is NOT considered GDP?

• Used goods: Already counted when produced.

• Financial transactions: Like stock purchases.

• Transfer payments: Such as Social Security benefits.

the four parts of the business cycle and be able to label it on a graph (including the axes).

• Parts: Expansion, Peak, Contraction, Trough

• Axes: X-axis = Time, Y-axis = Real GDP

three features of each expansion and contraction

• Expansion:

  • GDP increases

  • Unemployment decreases

  • Inflation may rise

• Contraction:

  • GDP decreases

  • Unemployment rises

  • Inflation may fall

describe a recession. How is it defined and how do we know if we’re in one?

• Recession: Two consecutive quarters of negative GDP growth.

• Indicators: Declining economic activity, rising unemployment, reduced consumer spending.

How does the Federal Reserve influence the business cycle?

• Monetary policy: Adjusts interest rates and money supply.

• Goal: Stabilize inflation and smooth out economic fluctuations.

What is inflation? (Both in a definition and what it means to consumers.)

• Inflation: The rate at which the general level of prices for goods and services rises.

• Consumers: Reduces purchasing power; money buys less.

There are two kinds of inflation. Name them and give an example.

• Demand-pull inflation: Caused by increased demand (e.g., holiday shopping season).

• Cost-push inflation: Caused by rising production costs (e.g., oil price hike).

What is CPI?

• CPI stands for Consumer Price Index.

• Measures average change over time in prices paid by urban consumers for a market basket of goods and services.

What is “the market basket”?

• A representative sample of goods and services consumed by households.

• Used to track changes in cost of living.

How does inflation impact personal finance?

• Purchasing power: Decreases over time.

• Savings: Real value erodes unless interest rates exceed inflation.

What number is the ideal “inflation rate”?

Target: Around 2% annually, as set by many central banks.

How does the Fed impact inflation?

• Tools: Adjusts interest rates and conducts open market operations.

• Objective: Control inflation and stabilize the economy.

Is inflation bad? Why or why not.

• Moderate inflation: Indicates a growing economy.

• High inflation: Erodes purchasing power; can lead to economic instability.

skimpflation and shrinkflation and be able to give an example of each.

• Skimpflation: Reduced quality of goods or services without lowering price (e.g., thinner pizza crust).

• Shrinkflation: Same price for less product (e.g., smaller candy bars).

What should consumers who are mindful of inflation check for when making purchases?

• Unit prices: Compare cost per unit.

• Product size: Be aware of packaging changes.

• Quality: Assess if value matches price.

Are skimpflation and shrinkflation legal? Why/How?

• Yes: Legal as long as packaging and labeling comply with regulations.

• Disclosure: Must not mislead consumers.

What is the current US Debt?

• As of March 6, 2025: Approximately $36.56 trillion .

What is the current US Debt to GDP ratio? What is a healthy ratio?

• Current ratio: Around 118% in 2035 .

• Healthy ratio: Generally, below 60% is considered sustainable.

Why is the US in so much debt? Be able to explain three reasons.

• Government spending: High levels on defense, healthcare, and Social Security.

• Tax policies: Tax cuts without equivalent spending reductions.

• Economic factors: Slow GDP growth and rising interest costs.