Gross Domestic Product (GDP) and Inflation

These flashcards cover the key concepts related to Gross Domestic Product and Inflation, including definitions, formulas, and implications.

What is GDP?

GDP stands for Gross Domestic Product, which is defined as the total monetary value of all final goods and services produced within a country's borders in a specified period, usually measured annually. It serves as a comprehensive scorecard of a country’s economic health and indicates the size and performance of an economy.

What percentage of Canada's GDP comes from services?

Approximately 72% of Canada's GDP is derived from the services sector. This highlights the dominance of services like healthcare, education, finance, and technology in the Canadian economy, compared to manufacturing and agriculture.

What are the two main approaches to GDP calculation?

The two primary approaches for calculating GDP are the income approach, which sums up all incomes earned by producers in the economy, including wages, profits, rents, and taxes minus subsidies, and the expenditure approach, which totals all expenditures made in the economy on final goods and services.

What is the formula for the Expenditure Approach to GDP?

The Expenditure Approach to GDP is expressed by the formula Y = C + I + G + NX, where Y represents GDP, C is consumer spending on goods and services, I is business investment in capital goods, G is government spending on public goods and services, and NX is net exports (exports minus imports). This approach emphasizes total demand for an economy's output.

What does NX stand for in the GDP formula?

NX stands for Net Exports in the GDP formula, which is calculated as the difference between a country's total exports (Ex) and total imports (Im). A positive NX indicates a trade surplus, while a negative NX indicates a trade deficit, reflecting the balance of a nation's global trade activities.

What does the GDP Deflator measure?

The GDP Deflator is an economic metric that measures the level of prices of all new, domestically produced, final goods and services in an economy. It is calculated by dividing nominal GDP by real GDP and multiplying by 100, providing insight into inflationary trends within the economy.

What is 'Real GDP'?

Real GDP is an inflation-adjusted measure of GDP that reflects the value of all final goods and services produced in a country at constant prices from a base year. This adjustment allows for a more accurate comparison of economic performance over time by eliminating the effects of price increases.

How do you calculate the percentage change in GDP?

The percentage change in GDP is calculated using the formula: (%Δ) = (NEW value - PREVIOUS value) / PREVIOUS value × 100%. This calculation indicates how much GDP has increased or decreased compared to a previous period, allowing for the analysis of economic growth or contraction.

What are some limitations of GDP as a measure of well-being?

While GDP is an important indicator of economic performance, it has several limitations as a measure of well-being. It does not account for income inequality, environmental degradation, unpaid work, or overall quality of life. Additionally, GDP may not reflect social and economic disparities affecting certain population segments.

What does HDI stand for and what does it measure?

HDI stands for Human Development Index, which is a composite index used to rank countries based on three key dimensions: life expectancy at birth (health), education (measured by mean years of schooling for adults and expected years of schooling for children), and the gross national income per capita. This index provides a broader understanding of human development than GDP alone.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) is a statistical measure that tracks changes in the price level of a basket of consumer goods and services, which typically includes items purchased by households such as food, clothing, and housing. The CPI is commonly used to assess inflation and cost of living adjustments.

What is inflation?

Inflation is defined as the rate at which the general level of prices for goods and services rises, eroding purchasing power. It is typically measured through indexes such as the Consumer Price Index (CPI) or the Producer Price Index (PPI), and can significantly impact economic stability and consumer behavior.

What is substitution bias in the context of the CPI?

Substitution bias refers to the phenomenon where consumers change their purchasing habits away from items that have become relatively more expensive to those that are relatively cheaper, potentially leading to an overestimation of the cost of living as measured by the CPI. This bias occurs because the fixed basket of goods used in CPI calculations does not account for changes in consumer behavior.

What is hyperinflation?

Hyperinflation is an extremely high and typically accelerating rate of inflation that surpasses 50% per month. It often results from a severe economic crisis, excessive monetary supply, or loss of confidence in the currency, leading to drastic increases in prices that can destabilize an economy.

What is the impact of inflation on savers?

Inflation decreases the real value of money over time, which negatively affects savers as the purchasing power of their saved funds diminishes. As prices rise, the return on savings may not keep pace with inflation, leading to a decrease in the real returns for savers.

What happens to real interest rates when inflation decreases unexpectedly?

When inflation decreases unexpectedly, real interest rates, which account for inflation, tend to increase. This scenario benefits lenders because the value of the money repaid will be higher in real terms, improving their returns relative to the diminished inflation