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GDP and Growth Flashcards

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  1. Which of the following is an example of a positive supply shock that would increase potential GDP?

    Answer: A significant increase in immigration of skilled workers

    An influx of skilled workers expands the labor supply and human capital, raising the economy's productive potential and long-run aggregate supply.

  2. Which statement about the GDP deflator versus the Consumer Price Index (CPI) is correct?

    Answer: The GDP deflator automatically adjusts its basket as spending patterns change, while the CPI uses a fixed basket

    The GDP deflator reflects the current composition of output (changing basket), whereas the CPI tracks a fixed market basket of consumer goods.

  3. Country X experiences a 3% increase in its labor force and a 2% increase in capital stock, with no technological change. According to the Solow growth model, its output growth will be:

    Answer: Less than 3% due to diminishing returns to labor

    Diminishing marginal returns mean output grows less than proportionally with factor inputs, so growth will be less than the sum of input growth rates.

  4. Net Domestic Product (NDP) differs from GDP because NDP:

    Answer: Subtracts capital consumption allowance (depreciation) from GDP

    NDP = GDP − Depreciation, reflecting the net addition to the capital stock after accounting for the wearing out of existing capital.

  5. An economy's real GDP grows at 4% per year. According to the Rule of 70, approximately how many years will it take for real GDP to double?

    Answer: 17.5 years

    Rule of 70: doubling time = 70 ÷ growth rate = 70 ÷ 4 = 17.5 years.

  6. Which scenario illustrates the difference between economic growth and economic development?

    Answer: A country's real GDP rises while life expectancy and literacy rates remain low

    Economic growth refers to rising output, while economic development encompasses broader human welfare indicators such as health and education; they can diverge.

  7. If a country's real GDP grows faster than its population growth rate, which of the following is necessarily true?

    Answer: Real GDP per capita is rising

    When real GDP growth exceeds population growth, real GDP per capita (real GDP ÷ population) rises, indicating improving average living standards.