MACRO: Measurement of Economic Performance Flashcards

Which of the following would cause measured GDP to increase even if actual well-being declines?

Answer: Increased spending on pollution cleanup after an oil spill

Cleanup expenditures register as economic activity and boost GDP, even though the oil spill itself reduced welfare.

The GDP deflator in Year 1 is 100 and in Year 2 is 110. Nominal GDP grew from $800B to $900B. Real GDP in Year 2 (base-year dollars) is approximately:

Answer: $818B

Real GDP = (Nominal GDP / GDP deflator) × 100 = ($900B / 110) × 100 ≈ $818B.

Which of the following is a shortcoming of GDP as a measure of economic welfare?

Answer: It does not account for the distribution of income or environmental quality

GDP measures total output but ignores inequality, environmental damage, and non-market production like household work.

If imports increase while all other expenditure components remain constant, what happens to GDP?

Answer: GDP decreases because net exports fall

In GDP = C + I + G + (X − M), a rise in imports (M) reduces net exports and therefore reduces GDP.

Which scenario best illustrates structural unemployment?

Answer: A steel worker loses his job when a mill automates and his skills become obsolete

Structural unemployment occurs when technological change or industry shifts permanently eliminate demand for certain skills.

A nation's nominal interest rate is 7% and the expected inflation rate is 3%. According to the Fisher equation, the real interest rate is:

Answer: 4%

Real interest rate ≈ nominal interest rate − expected inflation = 7% − 3% = 4%.

Which of the following is counted in U.S. GDP?

Answer: A new home built and sold in Chicago

New residential construction is investment (I) and is included in GDP; transfer payments and financial transactions are excluded.