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Q1
Question:
Explain the term gross fixed capital formation
Answer:
The investment spending by private firms on
items such as factories and equipment, and
government on capital items.
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Q2
Question:
Explain the term compensation of employees.
Answer:
Financial compensation for labour supplied,eg
salaries, wages and taxable allowances
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Q3
Question:
Define real GDP.
Answer:
Refers to nominal GDP adjusted for price
changes relative to some base year
• Q4
• Question:
• Why is GDP calculated in both real and nominal
terms?
• Answer:
• Nominal GDP shows the current value of what is
produced while Real GDP is adjusted for the
effects of inflation. It is the changes in Real GDP
that allow us to measure increases in production
and therefore, in real terms, increases in the
standard of living
• Q5
• Question:
• Give two reasons why the official figures for
National Income (GDP) may understate the true
level of economic activity.
• Answer:
• Non-market activities are ignored in the
calculation of GDP, eg unpaid work of
housepersons. Black of underground economy is
ignored , eg crime.
• Q6
• Question:
• Explain why, in the simple flow model, economic activity can be
measured by either the flow of incomes or by the flow of payment
for goods and services.
• Answer:
• The total value of the output of any economy can be obtained by
measuring the incomes earned in the production of goods or the
spending on the same production. If we assume that all goods and
services produced are consumption goods, and that all income is
spent on consumption goods, then the value of spending on
national output must always equal the value of income earned
(national income).
• Q7
• Question:
• Explain why economic growth might result in a
deterioration in the current account.
• Answer:
• Economic growth leads to higher disposable
incomes leading to higher spending on
imports worsening the Current Account
balance, ceteris paribus
• Q8
• Question:
• C + I + G +(X-M) is the formula for calculating
Gross Domestic Product (GDP) using the:
• Answer:
• Expenditure method
• Q9
• Question:
• (i) Why is the figure for imports of goods and services deducted in
expenditure on New Zealand's GDP? (ii) Why is a figure for the '
value of physical increase in stocks' included?
• Answer:
• (i) They are included in expenditure but are not produced in New
Zealand. (ii) They are goods and services produced (so are part of
GDP). If there is an increase in stocks available for sale, this leads to
and increase in GDP. A decrease in stocks for goods will reduce GDP.
This is done because we are interested in determining the value of
output in the current year.
• Q10
• Question:
• Outline the major divisions of the expenditure
method to calculate GDP.
• Answer:
• Final expenditure by private plus gross fixed
capital formation plus final expenditure by
government plus net exports plus change in
stocks, plus statistical discrepancy.