IMPROVED ECONOMIC 1002 FINAL EXAM

IMPROVED ECONOMIC 1002 FINAL EXAM Why must an economy's income equal its expenditure (spending) ? - CORRECT ANSWER -Every transaction has a buyer and a seller, therefore Total expenditure must be equal to total income otherwise it doesn't make sense. Expenditure (spending) by the buyers must equal the income of the seller. I paid 20$ for my friends skateboard (Buyer (me) expenditure = 20$ = income of seller (friend)). What is GDP? - CORRECT ANSWER -The Market Value of All Final Good and Services Produced Within a Country in a Given Period of Time. In the definition of GDP, What does "the Market Value" mean? - CORRECT ANSWER -The price of an asset would trade for in a marketplace setting. Market values are calculated by using market prices. In the definition of GDP, What does "of All" mean? - CORRECT ANSWER -GDP includes "all" items produced and sold LEGALLY in the economy 2 notes: 1. Value of housing services is difficult to measure. If a house is rented, the value of the rent is used to measure the value of the housing services. However if a house is owned (or mortgaged) the government ESTIMATES the value of the rent and uses that value as the value of the housing service. 2. GDP DOES NOT INCLUDE ILLEAGAL GOODS OR SERVICES. Even items produced and consumed at home, they don't count towards GDP ex. IF you hire someone to mow your lawn, that counts towards GDP, but if you mow your own lawn, that doesn't count In the definition of GDP, What does "Final" mean? - CORRECT ANSWER -Intermediate goods ARE NOT included in GDP (goods used in the production of the final goods, ex. wheat (bread), steel (pole), sugar (cakes)). Its not included, because its already part of the value of the final good. Also goods that are placed into inventory are considered to be "final" and included in GDP as firm's inventory investment. Goods sold out of inventory are a decrease in inventory investment In the definition of GDP, What does "Good and Services" mean? - CORRECT ANSWER -GDP includes both tangible goods and tangible services Ex. Bread, butter, Bike, Water bottle (goods). Ex. Massage, Mowing the lawn, Hiring a lawyer (services). In the definition of GDP, What does "Produced" mean? - CORRECT ANSWER -Only CURRENT production is counted towards GDP, used goods, that are resold DO NOT COUNT towards the GDP In the definition of GDP, What does "Within a Country" mean? - CORRECT ANSWER -GDP measures the production that takes place within the geographical boundaries of a particular country Ex. If a British citizen is working temporarily in Canada, the value of his output is included in Canadian GDP. Ex. If a Canadian owns a firm in Haiti, the value of the production of that firm is not included in Canadian GDP. Ex. The production of a foreign firm operating in Canada is included in Canadian GDP (even though it is a foreign firm, the firm workers are all local residents that fuel the domestic (Canadian) economy, by just living and eating). In the definition of GDP, What does "in a Given Period of Time" mean? - CORRECT ANSWER -Usual interval of time used to measure GDP is a year or a quarter (3 months). When the government reports GDP for a quarter, the data is generally reported on an annual basis. Also data is generally adjusted for regular seasonal changes (like Christmas). What is the GDP's 4 components of expenditure? - CORRECT ANSWER -consumption, investment, government purchases, and net exports What is Consumption? - CORRECT ANSWER -Includes spending on goods and services by households Exception: purchases of new housing What is investment? - CORRECT ANSWER -Includes spending on new equipment and structures, including households' purchases of new housing What is Government purchases? - CORRECT ANSWER -Includes spending on goods and services by local, provincial, and federal governments (included are salaries of gov. workers) (not included are transfer payments) What is net exports? - CORRECT ANSWER -exports - imports = net exports Exports: the value of goods and services produced domestically and sold abroad Imports: the value of goods and services produced abroad and sold domestically. What is the Gross Domestic Product formula? - CORRECT ANSWER -Y = C + I + G + NX Y : stands for income, because the letter "I" is already used for investment C : Consumption I : Investment G : Government spending (purchases) NX : Net exports What is Nominal and Real GDP? - CORRECT ANSWER -Nominal GDP: value is based on current prices (unadjusted for inflation) Real GDP: Value is based on constant prices (adjusted for inflation)