GDP Basics
This is the total dollar value of all final goods and services produced within a country's borders during a specific period.
GDP (Gross Domestic Product)
A family pays a babysitter $50 for childcare. Is this transaction included in GDP?
yes, because it is a paid market service
This phase of the business cycle occurs when the economy is growing and production and employment generally increase.
expansion
When the government increases spending or changes taxes to influence the economy, this is called ______ policy.
fiscal policy
This occurs when a small number of businesses dominate a market.
oligopoly
GDP can be calculated using this formula:
C + I + G + (X − M)
A person sells their used car to another person for $10,000. Is the $10,000 included in GDP?
no, because the car was not newly produced
This occurs when economic activity reaches its highest point before beginning to decline.
peak
The Federal Reserve is responsible for conducting this type of policy.
monetary policy
A business competes by offering better customer service and unique features rather than simply lowering its price. This is called ______ competition.
nonprice competition
In the GDP formula, this component represents purchases made by households.
Consumer Spending
A farmer sells wheat to a bakery, and the bakery uses the wheat to make bread. Why isn't the farmer's wheat counted separately in final GDP?
because wheat is an intermediate good and its value is included in the final bread
During an expansion, a luxury car manufacturer experiences a large increase in sales. What economic factor could help explain this?
increased consumer spending and rising incomes/wages
The government builds new highways and bridges and hires workers to complete the projects. What is this an example of?
expansionary fiscal policy
A country exports $500 billion worth of goods and imports $600 billion. What are its net exports?
$100 billion
Exports − Imports = $500B − $600B = −$100B
A country has $2 trillion in consumer spending, $500 billion in business investment, $700 billion in government spending, $400 billion in exports, and $300 billion in imports. What is its GDP?
$3.3 trillion
$2T + $500B + $700B + ($400B − $300B) = $3.3T
A volunteer group spends Saturday cleaning a public park without receiving payment. Is this service included in GDP?
no, because it is not a market transaction
Unemployment is extremely low and GDP is rising rapidly. Businesses begin competing for a limited number of workers, causing wages to rise. What problem could develop?
inflation
The economy is in a severe depression. Unemployment is high and production is falling. The government increases spending while the central bank lowers interest rates. What is the goal?
stimulating economic activity
A country restricts imports while encouraging domestic companies to export more. What component of GDP would most likely increase?
net exports (X − M)
A country has GDP of $20 trillion and a population of 330 million. If GDP increases while the population stays the same, this measure will increase.
GDP per capita
A foreign company builds a new factory inside the United States. Is the factory's production included in U.S. GDP?
yes, because GDP measures production within a country's borders
A country experiences falling production, high unemployment, and declining consumer spending. What stage of the business cycle is most likely occurring?
recession
The Federal Reserve reduces the money supply. What will most likely happen to interest rates and borrowing?
interest rates will increase, making borrowing more expensive and potentially slowing the economy
A country relies heavily on gasoline-powered automobile exports. Consumers around the world suddenly switch to electric vehicles, but the country's manufacturers are slow to adapt. Which GDP component is most likely to decrease?
net exports (X − M)