The document explains key economic concepts such as Gross Domestic Product (GDP), distinguishing between nominal GDP, which reflects current prices, and real GDP, which accounts for inflation. It details the calculation and significance of the GDP deflator as a measure of price changes and compares it with the Consumer Price Index (CPI). Additionally, the document covers concepts like the production-possibility frontier, savings, and consumption, providing a comprehensive overview of essential economic frameworks.

1. economics
IMPORTANT QUESTIONS

2. Gross Domestic Product
 The Gross domestic Product (GDP) is the market value of all final goods and
services produced within a country in a given period of time. The GDP is the
officially recognized totals. The following equation is used to calculate the GDP:
 [latex]GDP = C + I + G + (X - M)[/latex]
 Written out, the equation for calculating GDP is:
 GDP = private consumption + gross investment + government investment +
government spending + (exports – imports).

3. GDP:
 For the gross domestic product, “gross” means that the GDP measures production
regardless of the various uses to which the product can be put. Production can be
used for immediate consumption, for investment into fixed assets or inventories,
or for replacing fixed assets that have depreciated. “Domestic” means that the
measurement of GDP contains only products from within its borders.

4. Nominal GDP
 The nominal GDP is the value of all the final goods and services that an economy
produced during a given year.
 It is calculated by using the prices that are current in the year in which the output
is produced. In economics, a nominal value is expressed in monetary terms.
 For example, a nominal value can change due to shifts in quantity and price. The
nominal GDP takes into account all of the changes that occurred for all goods and
services produced during a given year. If prices change from one period to the
next and the output does not change, the nominal GDP would change even
though the output remained constant.

5. Real GDP
 The real GDP is the total value of all of the final goods and services that an
economy produces during a given year, accounting for inflation. It is calculated
using the prices of a selected base year.
 To calculate Real GDP, you must determine how much GDP has been changed by
inflation since the base year, and divide out the inflation each year. Real GDP,
therefore, accounts for the fact that if prices change but output doesn’t, nominal
GDP would change.

6. Real GDP:
 In economics, real value is not influenced by changes in price, it is only impacted
by changes in quantity. Real values measure the purchasing power net of any price
changes over time.
 The real GDP determines the purchasing power net of price changes for a given
year. Real GDP accounts for inflation and deflation. It transforms the money-value
measure, nominal GDP, into an index for quantity of total output.

7. The GDP Deflator
 The GDP deflator is a price index that measures inflation or deflation in an
economy by calculating a ratio of nominal GDP to real GDP.
 The GDP deflator (implicit price deflator for GDP) is a measure of the level of
prices of all new, domestically produced, final goods and services in an economy.
It is a price index that measures price inflation or deflation, and is calculated using
nominal GDP and real GDP.

8. Nominal GDP versus Real GDP
 Nominal GDP, or unadjusted GDP, is the market value of all final goods produced
in a geographical region, usually a country. That market value depends on the
quantities of goods and services produced and their respective prices. Therefore, if
prices change from one period to the next but actual output does not, nominal
GDP would also change even though output remained constant.
 In contrast, real gross domestic product accounts for price changes that may have
occurred due to inflation. In other words, real GDP is nominal GDP adjusted for
inflation. If prices change from one period to the next but actual output does not,
real GDP would be remain the same. Real GDP reflects changes in real production.
If there is no inflation or deflation, nominal GDP will be the same as real GDP.

9. Calculating the GDP Deflator:
 The GDP deflator is calculated by dividing nominal GDP by real GDP and
multiplying by 100.
 GDP Deflator = Nominal GDP x 100
Real GDP
 Consider a numeric example: if nominal GDP is $100,000, and real GDP is $45,000,
then the GDP deflator will be 222 (GDP deflator = $100,000/$45,000 * 100 =
222.22).
 In the U.S., GDP and GDP deflator are calculated by the U.S. Bureau of Economic
Analysis

10. Relationship between GDP Deflator and CPI
 Like the Consumer Price Index (CPI), the GDP deflator is a measure of price
inflation/deflation with respect to a specific base year. Similar to the CPI, the GDP
deflator of the base year itself is equal to 100.
 Unlike the CPI, the GDP deflator is not based on a fixed basket of goods and
services; the “basket” for the GDP deflator is allowed to change from year to year
with people’s consumption and investment patterns. However, trends in the GDP
deflator will be similar to trends in the CPI.

11. What Is the Difference Between Real and
Nominal GNP:
 The difference between real and nominal GNP, or gross national product, is that
the nominal GNP is calculated at the current price levels of the economy, and the
real GNP is calculated relative to a set base year. Nominal GNP is typically used to
compare current economies at current price levels, and real GNP can be used to
evaluate a single economy's history.

12. What Is the Difference Between Real and
Nominal GNP:
 In economics, real and nominal are always used to refer to the difference between
something at its current price, or its nominal price, and something at its price
relative to a base year, or real price. This can be used to evaluate both currency
trends, GDP, GNP and interest rates.

13. Production-Possibility Frontier
 Productivity growth is bound by what is called the production-possibility frontier
(PPF), which essentially stipulates a series of maximum amounts of two
commodities that can be generated using a fixed amount the relevant factors of
production.
 In the context of a given PPF, only an increase in overall supply of inputs or a
technological advancement will allow for the PPF to shift out and allow for an
increase in potential outputs of both goods simultaneously (represented by point
‘X’ in the figure).
 The shift due to changes in technology represents increased productivity. This is a
critical component in understanding the role of technology in productivity, as it is
a primary influence on increasing the prospective production possibilities

14. Diagram:

15. What are Savings
 Savings, according to Keynesian economics, are what a person has left over when
the cost of his or her consumer expenditure is subtracted from the amount
of disposable income earned in a given period of time. For those who are
financially prudent, the amount of money left over after personal expenses have
been met can be positive; for those who tend to rely on credit and loans to make
ends meet, there is no money left for savings. Savings can be used to
increase income through investing in different investment vehicles

16. What is consumption:
 Consumption, in economics, the use of goods and services by
households. Consumption is distinct from consumption expenditure, which is the
purchase of goods and services for use by households. Consumption differs
from consumption expenditure primarily because durable goods, such as
automobiles, generate an expenditure mainly in the period when they are
purchased, but they generate “consumption services” (for example, an automobile
provides transportation services) until they are replaced or scrapped