Measuring the Size of the Economy: Gross Domestic Product

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65 Terms

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Macroeconomics

Measure of how a country is performing and includes all production and consumption within every market.

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What are the 3 macroeconomic goals?

Economic growth, low unemployment, and low inflation

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What does macroeconomics focus on?

It focuses on the economy as a whole and how whole economies interact

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Is production supply or demand?

supply

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Is consumption supply or demand?

demand

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Economic Growth

Economic growth determines the standard of living in a country, measured by the change in GDP adjusted for inflation.

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Low employment

Unemployment is the percentage of the labor force without a job.

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Low inflation 

Inflation is the overall increase in the level of prices in an economy. Inflation is measured by the Consumer Price Index

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What are the principal tools that economists use?

Theories and models

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In macroeconomics what theories do you use?

Aggregate demand and aggregate supply

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What are two perspectives of macroeconomics?

Neoclassical and Keynesian

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What does the Monetary Policy involve?

Managing the money supply and interest rates

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What does the Fiscal Policy involve?

Changes in government spending, purchases, and taxes

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What’s the first step in macroeconomics?

Measuring the overall economy

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How do economists measure the size of a nation’s overall economy?

GDP

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What does GDP mean?

Gross domestic product 

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What are 3 ways to measure GDP?

By demand, by supply, and the national income approach 

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How do you measure GDP by Demand?

Consumption, Investment, Government spending on goods and services, and spending on net exports

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Whats the largest compenent of GDP?

Consumption

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How much does consumption account for?

two-thirds in any year

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What does consumption tell us?

The spending decisions are a major driver of the economy

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Does consumer spending fluctuate much with consumption?

No, not much, and it only increased modestly over time

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What do investment expenditures refer to?

To purchase buildings and equipment

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Does investment fluctuate more noticeably than consumption?

yes

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What demand is far smaller than consumption demand?

investment demand

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How much does investment demand account for?

15%-18% of GDP

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Buying a new fighter jet for the Air Force

Federal government spending

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Building a new highway

State government spending

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Building a new school

Local government spending

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What is the only art of government spending that is counted in demand?

Government purchases of goods or services produced in the economy

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What does exports > imports mean?

trade surplus

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What does imports > exports mean?

trade deficit

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Exports

Domestically porduced goods that a country sells abroad

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Imports

Goods produced in other countries that residents of this country purchase

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What’s the gap between exports and imports called?

Trade balance

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How do you measure GDP by Supply?

Durable goods, Non-durable goods, services, structures, and inventories

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What’s another way to measure GDP?

Adding up all the income produced in a year

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The total value of a nation’s output is equal to what?

The total value of its income

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Double counting

Counting output more than once as it travels through production

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How do you avoid double-counting?

Only count the value of final goods and services, not intermediate goods

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What does Gross National Product mean?

Measures what a country’s citizens and firms produce, regardless of whether it is produced domestically or internationally

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What does Net National Product mean?

GNP minus how much physical capital depreciates due to aging over the course of a year

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Can GNP or NNP be divided into national income and personal income?

NNP

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Nominal GDP

Equal to the quantity of every good or service produced, multiplied by the price at which it was sold, summed up for all goods and services

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Real GDP

Equal to nominal GDP divided by the price index

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GDP deflator

A price index measuring the average prices of all final goods and services included in the economy

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What’s the equation of the GDP deflator?

Nominal GDP/Real GDP x 100

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What’s the equation of the Real GDP?

Nominal GDP/ (Price index/100)

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What do we use to compute the real statistic?

Prices in the base year

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One year/period plays a special role in what?

Whenever you compute a statistic in real terms instead of nominal terms across a period of time

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How do you calculate real GDP

The quantities of goods and services produced in each year are multiplied by their base year price

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As long as inflation is positive, real GDP should be what?

Less than nominal GDP in any year after the base year

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What’s amplified by inflation?

Value of nominal GDP

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Nominal and real GDP will be what in the base year?

Equal

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What’s the equation of real GDP growth rate?

(Current year real GDP— base year real GDP)/base year real GDP x 100

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How long does the business cycle run?

From the height of the economy to the lowest point and back to the peak

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How long does a recession last?

It lasts from peak to trough

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How long does an economic upswing last?

From trough to peak

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What is a depression?

A longer and deeper decline

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What are the steps to calculating CPI?

Fix the basket, find the prices, then compute the basket’s cost, Choose a base year, and the compute the inflation rate

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What’s the CPI equation?

Inflation rate in year 2 = CPI in year2 — CPI in year 1/ CPI in year 1 × 100

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What societal factors are not included in GDP?

Environmental cleanliness, population health, air quality, and infant mortality rates

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