Remember to to the online quiz for this chapter and send me your results!

1. Define GDP.
The market value of all final goods and services produced within a country in a given period of time.
2. What are the two ways you can arrive at GDP figures?

• GDP can be computed by adding up the total expenditure of households in the economy
• GDP can also be computed by adding up the total income paid by firms in the economy, which will consist of wages, rent, and profit

3. What are the componets of GDP? Define each
Consumption: spending by households on goods and services, with the exception of purchases of new housing
Investment: spending on capital equipment, inventories, and structures, including household purchses of new housing
Government purchases: spending on goods and services by local, state, and federal governments
Net exports: spending on domestically produced goods by foreigners (exports) minus spending on foreign goods by domestic residents (imports)

4. Give examples of each component of GDP.

• Consumption is spending of househols on goods and services, such as a meal at burger king.
• Investment is the of capital equipment, inventories, and structures, such as the General Motors factory.
• Government purchases include spending on goods and services by local, state and federal governments such as the Airforce purchase of Jets.
• Net Exports equal the purchases of domestically produced goods of foreigners (exports) minus the domestic purchases of foreign goods (imports.)

5. What is the difference between real and nominal GDP? Which do we care about more and why?
We care about knowing a country's real GDP, bec. it helps determine an economy's trends over a period of time. To do this you need to take out an extra variable-- changes in price. By picking a base year in which to value the price, you can figure out the quantity changes in G&S as opposed to the price changes.

Real GDP= Production of goods and services valued at constant prices
Nominal GDP= Production of goods and services valued at current prices

6. What is the GDP Deflator and how is it useful?
GDP Deflator = Nominal GDP/Real GDP x 100
Measures the price level, calculated by the equation
Reflects the prices of goods and services

7. What is the relationshp between GDP and economic well-being?

• GDP measures both the economy's total income and the economy's total expenditure in goods and services.
• This helps indicate the estimated income and spending of an average individual within this economy
• thus, if the GDP is higher, a higher average income and expenditure is implied, which determines economic well-being

8. What are important activities that are left out of GDP?
Value of leisure
Value of a clean environment
omits value of goods and services produced at home (ex. volunteer work)
Doesn't indicate distribution of income
Doesn't indicate transactions occuring outside the market (underground economy, such as prostitution, etc.)

9. What does GDP indicate regarding quality of life?
It indicates the income and expenditure of the average person in the economy, and for the most part since people would prefer to receive higher income and enjoy higher expenditure, GDP per person is a good measure for quality of life, although it is not perfect as it leaves out many other important contribution to the quality of life (see above).
10. What are some problems associated with GDP?

11. Explain the difference between GDP and GNP (you will need to look this one up!)

• GDP (Gross Domestic Product) measures the size of the economy of a country, while GNP (Gross National Product)is "the total dollar value of all final goods and services produced for consumption in society during a particular time period. Its rise or fall measures economic activity based on the labor and production output within a country."

12. If GDP is rising, does that mean it is always good for the country? How might is be a negative?

• No, because a rise in the GDP can mean also a rise in inflation.