Exam (elaborations)
GDP: Factors
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Q&A on basic knowledge of what GDP is and how it works.
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Intro to Gross Domestic ProductWhat are the two things measured by Gross Domestic Product? How can it measure two
things at the same time?
• It measures, 1. Total income of all people in the economy and 2. Total spending on
the economy's products (goods and services). GDP can measure these two things
at the same time because both are actually the same thing: for an economy as a
whole, income must be equal to spending.
What contributes more to GDP: the production of one kilogram of hamburger meat or the
production of one kilogram of caviar? Why?
• The production of one kilogram of caviar contributes more to GDP than the
production of one kilogram of hamburgers, because GDP contribution is measured
through the market value and the price of one kilogram of caviar is much higher
than the price of one kilogram of hamburgers.
Explain why the income of an economy must be equal to its spending.
• Because in each transaction there are two parties involved a seller and a buyer
therefore each monetary unit spent by a buyer is a monetary unit of income for
the seller. In the same way seen from the circular flow diagram money flows from
households to businesses through the goods and services market and returns to
families through the production factor market.
What contributes more to GDP, the manufacture of an economical car or the manufacture
of a luxury car? Why?
• The construction of a luxury car contributes more to GDP since the luxury car costs
much more in the market than an economical car, it also requires higher expenses
in services such as maintenance, secure garage etc. A farmer sells wheat to a baker
for $2. The baker uses the wheat to make bread, which he sells for $3. What is the
total contribution of these transactions to GDP?
• The contribution is three which is the market price of the bread because the wheat
would be a transitional good and cannot be taken into account for GDP calculation.
Mention the four components of GDP. Provide an example of each.
1. Consumption: Household spending on goods and services except for new
home purchases. Example: purchase of a new car, payment of telephone
service, cable television.
2. Investment: Purchase of goods that will be used in the future to produce
more goods and services. Such as purchases of capital equipment,
inventories, and structures including new home purchases. Example:
Purchase of a new factory to manufacture shoes, the production of toys
that will be stored to sell in the next Christmas season. 3. Government
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