Final Test – multiple choice

How to get a final mark

„Microeconomics 6e” Prentice Hall Publishing House, June 2004 ISBN: 0-13-191207-0

Czarny B. „Podstawy Ekonomii” Begg D., „Economics” http://www.ioz.pwr.wroc.pl/Pracownicy/Chodak/ http://windward.hawaii.edu/facstaff/briggs-p/

Macroeconomics/macrolectures.htm www.wikipedia.org

Bibliography

Measuring a Nation’s Income

The Economy’s Income and Expenditure

When judging whether the economy is doing well or poorly, it is natural to look at the total income that everyone in the economy is earning.To have this number make sense, it is also best to look at income per person.

For an economy as a whole, income must equal expenditure because: Every transaction has a buyer and a seller. Every dollar of spending by some buyer is a

dollar of income for some seller. Say’s Law-Supply creates it’s own demand This process can be seen using a Circular Flow Diagram.

The Economy’s Income and Expenditure

The Circular-Flow Diagram

Firms Households

Market for Factors

of Production

Market for Goods

and Services

SpendingRevenue

Wages, rent, and

profit

Income

Goods & Services

sold

Goods & Services bought

Labor, land, and capital

Inputs for production

Gross domestic product (GDP) is a measure of the income and expenditures of an economy.

It is the total market value of all final goods and services produced within a country in a given period of time.

How much is the current GDP per capita?

Gross Domestic Product

GDP (current U$) GDP per capita (current U$) GDP per capita (PPP-purchasing power parity) GNI per capita (current U$) GNI per capita (PPP) GDP annual growth

Fertility rate Life expectancy Literacy rate

Important indicators

GDP is: GDP can be defined in three ways, all of which are conceptually identical. 1. First, it is equal to the total expenditures for all final

goods and services produced within the country in a stipulated period of time (usually a 365-day year).

2. Second, it is equal to the sum of the value added at every stage of production (the intermediate stages) by all the industries within a country, plus taxes less subsidies on products, in the period.

3. Third, it is equal to the sum of the income generated by production in the country in the period—that is, compensation of employees, taxes on production and imports less subsidies, and gross operating surplus (or profits).

The Measurement of GDP

In economics final goods are goods that are ultimately consumed rather than used in the production of another good.

For example, a car sold to a consumer is a final good;

The components such as tires sold to the car manufacturer are not; they are intermediate goods used to make the final good.

Final goods

Value added refers to the additional value of a commodity over the cost of commodities used to produce it from the previous stage of production.

It refers to the contribution of the factors of production, i.e., land, labour, and capital goods, to raising the value of a product and corresponds to the incomes received by the owners of these factors.

In national accounts such as the United Nations System of National Accounts (UNSNA), gross value added is obtained by deducting intermediate consumption from gross output. Thus gross value added is equal to net output.

Value added

What Is Counted and Not Counted in GDP?GDP includes all items produced in the economy and sold legally in markets.GDP excludes services that are produced and consumed at home and that never enter the marketplace.

Caring labour, the work that is normally produced by women.Because GDP does not count it, it diminishes its importance.

GDP also excludes black market items, such as illegal drugs.

Gross National Product (GNP)Net National Product (NNP)National IncomePersonal IncomeDisposable Personal Income

Other Measures of Income

GDP (Y ) is the sum of the following: Consumption (C) Investment (I) Government Purchases (G) Net Exports (NX)

Y = C + I + G + NX

The Components of GDP

GDP and Its Components (1998, USA)

Total (Billions of Dollars)

Per Person (In Dollars)

% of Total

GDP (Y) $8,511 $31,522 100%

Consumption C 5,808 21,511 68%

Investment I 1,367 5,507 16%

Government G 1,487 5,507 18%

Net Exports NX -151 -559 -2%

Net Exports -2 %

GDP and Its Components (1998)

Consumption 68 %

Investment16%

Government Purchases

18%

◦ We use real GDP to calculate the economic growth rate.

◦ The economic growth rate is the percentage change in the quantity of goods and services produced from one year to the next.

◦ We measure economic growth so we can make: Economic welfare comparisons International welfare comparisons Business cycle forecasts

Measuring Economic Growth

Business Cycle Forecasts◦ Real GDP is used to measure business cycle

fluctuations.

Measuring Economic Growth

Nominal GDP values the production of goods and services at current prices.

Real GDP values the production of goods and services at constant prices.

Real versus Nominal GDP

Deflating the GDP Balloon◦Nominal GDP increases because production—real GDP– increases.

Real GDP and the Price Level

Deflating the GDP Balloon

Real GDP and the Price Level

Nominal GDP also increases because prices rise.

We use the GDP Deflator to take the air out of Nominal GDP.

Real GDP and the Price Level

(Periods of falling real GDP)

Real GDP in the United States

1970 1975 1980 1985 1990 19953,000

4,000

5,000

6,000

7,000

Billions of 1992 Dollars

2000

8,000

Bibliography:http://windward.hawaii.edu/facstaff/briggs-p/Macroeconomics/macrolectures.htmCzarny Bogusław, Podstawy Ekonomii, PWE 2002