Measuring Economic Performance: GDP, Growth, and Well-Being Free Online FlashCards

What are the four sectors of a national economy?

Households supply factor services and consume, firms produce, government taxes and purchases, and the foreign sector trades exports and imports with the domestic economy.

Define gross domestic product (GDP).

GDP is the market value of all final goods and services produced within a country’s borders during a specified period.

Why does GDP count final goods rather than intermediate goods?

GDP counts final goods to avoid double counting. An intermediate good is an input used to produce another good, so its value is included in the final product’s price.

In the wheat–flour–bread example, what is total value added?

Total value added is $9: $2 by the farmer, $3 by the mill, and $4 by the bakery. This equals the final bread’s selling price.

What is the expenditure identity for GDP?

The expenditure identity is Y = C + I + G + (X − M), where consumption, investment, government purchases, and net exports are added.

Calculate GDP: C=700, I=180, G=250, X=90, M=120 (billions).

GDP = 700 + 180 + 250 + (90 − 120) = $1,000 billion. Net exports are −$30 billion, indicating a trade deficit.

What counts as investment in national-income accounting?

Investment includes newly produced machinery, equipment, structures, new residential construction, and inventory changes. Buying stocks or bonds is a financial transaction, not current production.

Why are imports subtracted in the expenditure approach?

Imports are subtracted because consumption, investment, or government spending can include foreign-produced goods. Subtraction removes that foreign production from domestic GDP.

What does the income approach add to measure GDP?

The income approach adds incomes and production-related costs generated by output, including compensation, taxes less subsidies, net operating surplus, and depreciation.

Why should total production, expenditure, and income be equal?

For the economy as a whole, value of production equals total expenditure and total income. Each perspective measures the same aggregate economic activity from a different angle.

How do nominal and real GDP differ?

Nominal GDP uses current-period prices, while real GDP uses constant or chained prices to remove the effect of price changes and measure changes in output quantity.

Compute the GDP deflator when nominal GDP is 300 and real GDP is 200.

GDP deflator = (300 ÷ 200) × 100 = 150. This indicates that domestically produced final-output prices are 50% above the index’s reference basis.