Chapter 11 Measuring the size of the economy Part 3

Flashcards based on Chapter 11 lecture notes, focusing on measuring the size of the economy, real GDP, nominal GDP, and related concepts.

What is the purpose of adjusting nominal GDP?

To reflect only changes in output by removing the impact of changing prices.

How is real GDP defined?

The value of all final goods produced during a given time period based on the prices existing in a selected base year. It is also referred to as constant-dollar GDP.

Define Nominal GDP.

GDP measured in current prices.

How does Real GDP differ from Nominal GDP?

Real GDP is nominal GDP adjusted for inflation using a price deflator; it is also called constant price GDP.

What are the two reasons nominal GDP grows over time?

Increases in output level and general prices.

Why is it necessary to adjust for the changing purchasing power of the dollar when calculating GDP?

To accurately reflect the real value of goods and services produced.

What tool is used to adjust nominal GDP to real GDP?

A price index.

What is the Consumer Price Index (CPI)?

A measure of the trend in the prices of goods and services purchased for consumption purposes.

Why does Nominal GDP grow faster than Real GDP?

Nominal GDP includes price level changes (inflation), while real GDP is adjusted for inflation.

Why is real GDP preferred for analysis?

It allows for more accurate comparisons of economic output over time by removing the effect of inflation.

How is real per capita GDP calculated?

By dividing the real GDP by the total population.

What does real per capita GDP indicate?

The value of real output of final goods and services per person, often cited as a measure of economic welfare.

What does higher GDP per person generally indicate?

A higher standard of living.

Is GDP a perfect measure of happiness or quality of life?

No, GDP is not a perfect measure of happiness or quality of life.

What are some shortcomings of GDP as a measure of economic welfare?

It doesn't fully measure non-market transactions, distribution of wealth, leisure time, the underground economy, and economic negatives like pollution. It is a quantitative, rather than qualitative, measure.

In a simple economy, what limits potential investment?

Actual saving.

What is the relationship between national saving, national investment, and the current account balance?

National saving – National investment = Current Account Balance

How can an open economy finance investment that exceeds savings?

By receiving savings from the rest of the world through foreign investment.

What does it mean if investment in a period exceeds savings for a country?

The country has a current account deficit (CAD).

What are two ways a country can finance a current account deficit (CAD)?

Incur debts to foreigners (debt) or provide them with a share of the ownership of productive factors (equity).

Where are the flows related to financing a CAD recorded?

In the capital account in the balance of payments.

What is the theoretical relationship between a CAD and the capital account?

In theory, a CAD must be exactly offset by a capital account surplus.