Ch6 Test Bank Measuring The Production, Income, And Spending

Chapter 6

Measuring the Production, Income, and Spending of Nations

Multiple Choice

In the process of calculating the production of the economy of the United States, which of the following must be taken into account?

a.	The fact that some of the goods that people buy are shipped to the United States from abroad
b.	The fact that some of the goods produced in the economy are shipped to other countries
c.	The fact that some goods are used as inputs into the production of other goods, like hamburgers
d.	All of the above
e.	Only a and b

OBJ: conceptual

SEC: 0. Measuring the Production, Income, and Spending of Nations

TOP: GDP

MSC: Bloom's: Knowledge | AACSB: Analytic

Simon Kuznets won a Nobel Prize in economics for his work on

a.	monetary theory.
b.	measuring national output.
c.	real business cycle theory.
d.	health-care economics.
e.	growth theory.

OBJ: factual

SEC: 0. Measuring the Production, Income, and Spending of Nations

TOP: GDP

MSC: Bloom's: Knowledge

GDP is

a.	a measure of the value of all newly produced final goods and services in a country during some period of time.
b.	a measure of the value of all goods and services produced in a country during some period of time, corrected for inflation.
c.	a measure of the value of all goods and services sold in a country during some period of time.
d.	a measure of the value of all goods and services produced by the nation's citizens during some period of time.
e.	a measure of the value of all goods and services produced by the nation's citizens during some period of time, corrected for inflation.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Definition of GDP

MSC: Bloom's: Comprehension

GDP is a measure of

a.	the total of wealth held by all residents in a nation.
b.	a nation’s total production.
c.	a nation’s money supply.
d.	the total prices of goods available in markets.
e.	the amount of resources available in a nation.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Definition of GDP

MSC: Bloom's: Knowledge

What best describes what is included in the GDP measure?

a.	Only newly produced goods
b.	Only newly produced services
c.	All goods and services sold
d.	Only newly produced goods and services
e.	Any economic interaction

OBJ: factual

SEC: 1. Measuring GDP

TOP: Definition of GDP

MSC: Bloom's: Knowledge

Where are the goods and services included in a country's GDP produced?

a.	Within the borders of that country plus those goods produced abroad by that country's residents, less domestic goods produced by foreign residents
b.	Within the borders of that country except for those goods produced in the country by nonresidents or with capital owned by foreigners
c.	Anywhere that country's residents produce goods and services
d.	Within that country's borders
e.	Anywhere that country's businesses produce goods and services

OBJ: factual

SEC: 1. Measuring GDP

TOP: Where GDP Is Produced

MSC: Bloom's: Knowledge | AACSB: Analytic

The numbers one finds when one measures the GDP of the United States are quite large, measured in trillions. How many billions constitute a trillion?

a.	10
b.	100
c.	1,000
d.	1 million
e.	None of these

OBJ: factual

TOP: Measure of GDP

MSC: Bloom's: Knowledge

What was the approximate level of GDP production in the United States in 2015?

a.	$18 trillion
b.	$180 billion
c.	$18 billion
d.	$1,800 million
e.	$1.8 trillion

OBJ: factual

SEC: 1. Measuring GDP TOP:

The Value of GDP

MSC: Bloom's: Knowledge

In dollar terms, U.S. GDP in 2015 is approximately

a.	$8,037,000,000,000,000.
b.	$8,037,000,000,000.
c.	$18,037,000,000,000,000.
d.	$18,037,000,000,000.
e.	$18,037,000.

OBJ: factual

SEC: 1. Measuring GDP

TOP: The Value of GDP

MSC: Bloom's: Knowledge

Jessy builds a desk that is valued at $200. To build the desk, he has purchased new materials for a total cost of $150. The value of GDP in this case would

a.	increase by $50.
b.	increase by $200.
c.	increase by $150.
d.	increase by $350.
e.	decrease by $50.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Calculating GDP

MSC: Bloom's: Application | AACSB: Analytic

Holly has recently graduated from college and has bought a house that was built 50 years ago for $100,000. She used a real estate agent to help her find and purchase the house, and the real estate agent received 5 percent of the value of the sale, or $5,000, to be paid by the seller of the house. The value of GDP in this case would

a.	increase by $100,000.
b.	increase by $95,000.
c.	increase by $105,000.
d.	increase by $5,000.
e.	not be affected because the house was not produced in the current time period.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Calculating GDP

MSC: Bloom's: Application | AACSB: Analytic

What is the role of weights in computing GDP?

a.	The weights take into account the different time periods in which the goods are produced.
b.	The weights take into account the different uses of the goods and services produced.
c.	The weights take into account the different locations in which the goods are produced.
d.	The weights enable the adding up of different products.
e.	The weights take into account whether the goods and services are for private or government use.

OBJ: factual

SEC: 1. Measuring GDP

TOP: GDP Weights

MSC: Bloom's: Knowledge

When computing U.S. GDP, a good or service is weighted

a.	according to corporate concerns.
b.	according to the quantity of the good or service available.
c.	according to the concerns of pressure groups.
d.	according to government directive.
e.	according to its value.

OBJ: factual

SEC: 1. Measuring GDP

TOP: GDP Weights

MSC: Bloom's: Knowledge

Exhibit 18-1

	Amount Produced	Price per Unit
Smartphones	10	$500
Movies	100	$10

Exhibit 18-1 summarizes a certain economy's final output. According to this table, GDP equals

a.	$500.
b.	$1,000.
c.	$5,000.
d.	$6,000.
e.	GDP cannot be computed with the given information.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Measuring GDP

MSC: Bloom's: Application | AACSB: Analytic

In a simple economy, Wanda's Weavers grows cotton and weaves it into cloth. In the current year, Wanda's Weavers produces cloth valued at $1,000, half of which it sells directly to consumers for their own personal use and half of which it sells to Joe's T-shirts. Joe's T-shirts produces T-shirts valued at $1,500 for the current year. What is the value of GDP in this simple economy?

a.	$2,500
b.	$1,500
c.	$500
d.	$1,000
e.	$2,000

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Intermediate and Final Goods

MSC: Bloom's: Application | AACSB: Analytic

Exhibit 18-2

Camera	$40
Battery	$25
Speaker	$20
Processer	$200
Screen	$50
Misc.	$115
Components Total	$450

Exhibit 18-2 shows the cost of the components used to produce a $550 smartphone. The total value of output that would be recorded in GDP is

a.	$200.
b.	$360.
c.	$400.
d.	$450.
e.	$550.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Intermediate and Final Goods

MSC: Bloom's: Application | AACSB: Analytic

An individual who purchases a computer later decides to acquire a new motherboard. In terms of computing GDP, this new motherboard would be a(n)

a.	economic good.
b.	final good.
c.	intermediate good.
d.	input.
e.	double good.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Intermediate and Final Goods

MSC: Bloom's: Application | AACSB: Analytic

Which of the following is most likely a final good?

a.	wheat
b.	crude oil
c.	steel
d.	cotton
e.	a laptop computer

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Intermediate and Final Goods

MSC: Bloom's: Application | AACSB: Analytic

If we calculate GDP by adding the dollars of all goods that buyers pay, we make an error as a result of

a.	omitting opportunity costs.
b.	double counting some goods.
c.	missing the negative values that some buyers perceive for some goods.
d.	omitting some measures of well-being.
e.	ignoring inflation.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Intermediate and Final Goods

MSC: Bloom's: Knowledge | AACSB: Analytic

GDP can be calculated by adding the value of

a.	all final goods produced in a country within a given period.
b.	all intermediate and final goods produced in a country within a given period.
c.	all intermediate goods produced in a country within a given period.
d.	all final goods produced in a country within a given period minus the value of all intermediate goods produced.
e.	all final goods or the value of all intermediate goods produced in a country within a given period, whichever is smaller.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Intermediate and Final Goods

MSC: Bloom's: Knowledge | AACSB: Analytic

GDP can be calculated only by using the ____ approach.

a.	spending
b.	income
c.	spending, income, production, or the NIPA
d.	spending, income, or production
e.	production

OBJ: factual

SEC: 1. Measuring GDP

TOP: Three Ways To Measure GDP

MSC: Bloom's: Knowledge

All of the following are approaches for calculating GDP EXCEPT

a.	spending.
b.	income.
c.	production.
d.	cost.
e.	None of these: All can be used to calculate GDP.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Three Ways To Measure GDP

MSC: Bloom's: Knowledge | AACSB: Analytic

U.S. GDP includes the value of goods and services produced by U.S. citizens abroad.

Basic

OBJ: factual

SEC: 1. Measuring GDP

TOP: Where GDP Is Produced

MSC: Bloom's: Knowledge

You sell your used calculus book to your friend. This transaction, in most cases, will not count in GDP.

Moderate

OBJ: conceptual

SEC: 1. Measuring GDP TOP:

Calculating GDP

MSC: Bloom's: Application | AACSB: Analytic

If you own and operate an antique store, this does not count in GDP because you are buying and selling used goods.

Moderate

OBJ: conceptual

SEC: 1. Measuring GDP TOP:

Calculating GDP

MSC: Bloom's: Application | AACSB: Analytic

You buy a new bed that was produced last year. GDP will increase this year by the value of the bed because the bed was sold this year.

Moderate

OBJ: conceptual

SEC: 1. Measuring GDP TOP:

Calculating GDP

MSC: Bloom's: Application | AACSB: Analytic

It is easier to measure GDP in a centrally planned economy than in a market economy.

Basic

OBJ: factual

SEC: 1. Measuring GDP TOP:

GDP Weights

MSC: Bloom's: Knowledge

One trillion is equal to 1 million millions, or 1,000,000,000,000.

Moderate

OBJ: factual

SEC: 1. Measuring GDP TOP:

Measure of GDP

MSC: Bloom's: Knowledge

In 2010, the United States GDP amounted to about $40 billion worth of goods and services a day, for each of the 365 days during the year.

Challenging

OBJ: factual

SEC: 1. Measuring GDP TOP:

U.S. GDP

MSC: Bloom's: Knowledge | AACSB: Analytic

Intermediate goods are part of final goods.

Basic

OBJ: factual

SEC: 1. Measuring GDP TOP:

Intermediate and Final Goods

MSC: Bloom's: Knowledge

The number of new cars produced in a given time period in the United States is a flow measure, while the number of cars in the United States is a stock measure.

Basic

OBJ: conceptual

SEC: 1. Measuring GDP TOP:

Stocks and Flows

MSC: Bloom's: Application

Multiple Choice

Total spending in the economy is divided into

a.	consumption, investment, government purchases, and exports.
b.	consumption, investment, government expenditures, and exports.
c.	market spending, nongovernmental organization spending, foreign spending, and government spending.
d.	consumption, investment, government expenditures, and net exports.
e.	consumption, investment, government purchases, and net exports.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Total Spending

MSC: Bloom's: Analysis | AACSB: Analytic

Which of the following is the correct ordering if we want to rank the four spending components, as a share of U.S. GDP in 2015, in descending (from highest to lowest) order?

a.	Consumption, government purchases, investment, net exports
b.	Consumption, investment, government purchases, net exports
c.	Government purchases, consumption, investment, net exports
d.	Consumption, government purchases, net exports, investment
e.	Consumption, investment, net exports, government purchases

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: The Four Spending Categories of GDP

MSC: Bloom's: Knowledge

The largest component of GDP is

a.	government purchases.
b.	investment.
c.	exports.
d.	consumption.
e.	government expenditures.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Consumption Expenditure

MSC: Bloom's: Knowledge

Consumption expenditures include

a.	expenditures by households on goods and services produced only in the United States.
b.	purchases of consumer goods produced in the United States by households, businesses, government, and other countries.
c.	purchases of consumer goods produced in the United States and the rest of the world by households, businesses, government, and other countries.
d.	expenditures by households on goods and services produced in the United States and the rest of the world.
e.	the purchase of new homes by households.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Consumption Expenditure

MSC: Bloom's: Knowledge

In 2015, consumption was roughly ____ of GDP in the United States.

a.	80 percent
b.	90 percent
c.	70 percent
d.	60 percent
e.	50 percent

OBJ: factual

SEC: 1. Measuring GDP

TOP: Consumption Expenditure

MSC: Bloom's: Knowledge

Investment is

a.	the purchase of final goods by business firms.
b.	the purchase of securities by business firms.
c.	the purchase of intermediate goods by business firms.
d.	the purchase of final goods by business firms and government.
e.	the purchase of final goods by the government.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Investment Expenditure

MSC: Bloom's: Knowledge

Investment expenditures are the sum of

a.	business fixed investment, residential investment, and financial investment.
b.	business fixed investment and services.
c.	business fixed investment plus financial investments.
d.	business fixed investment plus inventories.
e.	business fixed investment, inventory investment, and residential investment.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Investment Expenditure

MSC: Bloom's: Knowledge

Expenditure on ____ is spending that is not included in GDP.

a.	used goods
b.	intermediate goods
c.	financial assets
d.	All of these
e.	None of these

OBJ: factual

SEC: 1. Measuring GDP

TOP: Investment Expenditure

MSC: Bloom's: Knowledge

If a computer retailer has 20 computers at the beginning of the month, receives an additional 35 computers during the month, and sells no computers during the month, the retailer's inventory investment for that month would be

a.	minus 35 computers.
b.	plus 20 computers.
c.	minus 20 computers.
d.	plus 35 computers.
e.	plus 55 computers.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Inventory Investment

MSC: Bloom's: Application | AACSB: Analytic

A computer dealer has 20 computers at the beginning of the month and receives an additional 35 computers during the month. If the computer dealer has 15 computers in stock at the end of the month, the dealer's inventory investment for that month would be

a.	minus 15 computers.
b.	plus 5 computers.
c.	minus 5 computers.
d.	plus 15 computers.
e.	plus 35 computers.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Inventory Investment

MSC: Bloom's: Application | AACSB: Analytic

Which of the following is a stock variable?

a.	Wealth
b.	Investment
c.	GDP
d.	Savings
e.	Income

OBJ: factual

SEC: 1. Measuring GDP

TOP: Stocks and Flows

MSC: Bloom's: Knowledge

Investment, as defined in the text, refers to

a.	putting away funds for the future.
b.	purchase of new capital, such as new factories or equipment.
c.	purchase of stocks and bonds.
d.	consumer purchases of big-ticket items.
e.	All of these

OBJ: factual

SEC: 1. Measuring GDP

TOP: Investment Expenditure

MSC: Bloom's: Comprehension

In which spending category would you enter the following transaction? Ford sells a Thunderbird from its inventory to an individual.

a.	Consumption
b.	Consumption and investment
c.	Investment
d.	Government purchases
e.	Net exports

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Inventory Investment

MSC: Bloom's: Application | AACSB: Analytic

In which spending category would you enter the following transaction? Company A successfully launches a hostile takeover of Company B, in which it purchases all the assets of Company B.

a.	Government purchases
b.	Net exports
c.	Investment
d.	Consumption
e.	None of these

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Inventory Investment

MSC: Bloom's: Analysis | AACSB: Analytic

In which spending category would you enter the following transaction? A restaurant purchases fresh fish at the local fish market that it plans to sell as one of its nightly specials.

a.	None of these
b.	Consumption
c.	Government purchases
d.	Investment
e.	Net exports

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Intermediate Good

MSC: Bloom's: Analysis | AACSB: Analytic

Inventory investment is included as a spending item when computing GDP because

a.	GDP is meant to be a measure of total sales.
b.	of a historical accident.
c.	it is the same as plant and equipment investment.
d.	not everything produced in a given time period is sold during that time period.
e.	there would otherwise be double counting.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Intermediate Good

MSC: Bloom's: Knowledge | AACSB: Analytic

Suppose that a car dealer had an inventory of 150 cars on December 31, 2015, got 35 new cars shipped from the factory during 2016, and sold 20 cars to consumers during the year, making the dealer's inventory equal to 165 cars on December 31, 2016. What was the contribution of the car dealer to inventory investment for 2016?

a.	165 cars
b.	35 cars
c.	15 cars
d.	None of these

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Inventory Investment

MSC: Bloom's: Application | AACSB: Analytic

In 2015, the United States imported more than it exported. As a result,

a.	the sum of consumption plus investment plus government purchases overstated what was produced in America.
b.	the sum of consumption plus investment plus government purchases understated what was produced in America.
c.	the sum of consumption plus investment plus government purchases equaled what was produced in America.
d.	the sum of consumption minus investment minus government purchases overstated what was produced in America.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Net Exports

MSC: Bloom's: Analysis | AACSB: Analytic

Which of the following statements is about the GDP of the United States in 2015?

a.	Imports exceeded exports by 600 million dollars.
b.	Exports exceeded imports by 600 million dollars.
c.	Exports plus imports equaled 600 billion dollars.
d.	None of these is true.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Net Exports

MSC: Bloom's: Knowledge

Which of the following statements is ?

a.	Inventory investment is the only component of investment spending that is not included in business fixed investment.
b.	Residential investment is the only component of investment spending that is not included in business fixed investment.
c.	Investment spending is the same as business fixed investment.
d.	Inventory investment and residential investment are not part of business fixed investment.
e.	Purchases of intermediate goods by businesses are included in business fixed investment.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Intermediate Good

MSC: Bloom's: Knowledge

Government purchases are defined as

a.	purchases of goods and services by the federal government.
b.	purchases of new goods and services and transfer payments by the federal government.
c.	purchases of new goods and services and transfer payments by federal, state, and local governments.
d.	purchases of new goods and services by federal, state, and local governments.
e.	purchases of goods and services by federal and foreign governments.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Government Spending

MSC: Bloom's: Comprehension

Transfer payments

a.	are excluded from GDP but included in government purchases.
b.	are excluded from government purchases and GDP.
c.	are included in government purchases and in GDP.
d.	are excluded from government purchases but included in GDP.
e.	are included in government purchases but excluded from GDP.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Government Spending

MSC: Bloom's: Knowledge | AACSB: Analytic

Net exports are

a.	the sum of exports and imports.
b.	the difference between exports and imports.
c.	exports net of services.
d.	imports less exports.
e.	exports earmarked for nongovernmental use.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Net Exports

MSC: Bloom's: Knowledge

Which of the following best explains what happens when a business firm purchases a drill press manufactured in Germany?

a.	There will be an increase in exports.
b.	There will be an increase in import spending.
c.	There will be an increase in investment expenditures.
d.	There will be an increase in both investment expenditures and import spending.
e.	There will be a decline in investment expenditures and an increase in import spending.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Imports

MSC: Bloom's: Analysis | AACSB: Analytic

If IBM manufactures a computer in the United States and sells it to a French business firm in Paris, it will cause an increase in

a.	net exports.
b.	imports.
c.	both investment and net exports.
d.	government expenditures.
e.	consumption.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Net Exports

MSC: Bloom's: Application | AACSB: Analytic

In which spending category would you enter the following transaction if you were trying to calculate U.S. GDP? "People in France flock to see the latest Brad Pitt movie that was produced in Hollywood."

a.	Net exports
b.	Consumption
c.	Investment
d.	Government purchases

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Net Exports

MSC: Bloom's: Application | AACSB: Analytic

For a hypothetical economy in a given year, consumption equaled $372, investment equaled $126, government purchases equaled $185, goods exported equaled $75, and goods imported equaled $84. What was the value of GDP?

a.	$842
b.	$683
c.	$674
d.	$692
e.	Not enough information is given.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Expenditure Equation

MSC: Bloom's: Application | AACSB: Analytic

For a hypothetical economy in a given year, GDP equaled $1,170, consumption equaled $482, investment equaled $286, goods exported equaled $198, and goods imported equaled $57. What did government spending equal?

a.	$402
b.	Not enough information is given.
c.	$543
d.	$261
e.	$147

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Expenditure Equation

MSC: Bloom's: Application | AACSB: Analytic

You buy a shirt made in Vietnam. This causes consumption spending to increase by the value of the shirt, import spending to increase by the value of the shirt, and hence GDP to increase.

Moderate

OBJ: conceptual

SEC: 1. Measuring GDP TOP:

Consumption Expenditure

MSC: Bloom's: Application | AACSB: Analytic

When you buy some stock of Google, it is an investment expenditure so it counts toward GDP.

Moderate

OBJ: factual

SEC: 1. Measuring GDP TOP:

Investment Expenditure

MSC: Bloom's: Application | AACSB: Analytic

Intermediate goods that go directly into a manufactured product are counted as investment.

Moderate

OBJ: factual

SEC: 1. Measuring GDP TOP:

Investment Expenditure

MSC: Bloom's: Knowledge

You buy a new TV that was produced last year. This causes consumption expenditure to increase for this year and investment expenditure to decrease by roughly the same amount.

Ture; Moderate

OBJ: conceptual

SEC: 1. Measuring GDP TOP:

Inventory Investment

MSC: Bloom's: Analysis | AACSB: Analytic

New homes purchased by households are part of investment expenditures.

Moderate

OBJ: factual

SEC: 1. Measuring GDP TOP:

Residential Investment

MSC: Bloom's: Knowledge

If inventories increase in a given year, they should be added in when calculating GDP.

Basic

OBJ: factual

SEC: 1. Measuring GDP TOP:

Inventory Investment

MSC: Bloom's: Knowledge

In 2015, the United States imported more than it exported; therefore, the sum of consumption plus investment plus government purchases overstated what was produced in America.

Moderate

OBJ: conceptual | factual

SEC: 1. Measuring GDP TOP:

Net Exports

MSC: Bloom's: Analysis | AACSB: Analytic

Social security payments are included in government purchases.

Basic

OBJ: factual

SEC: 1. Measuring GDP TOP:

Social Security Payments

MSC: Bloom's: Knowledge

Investment spending, as a share of GDP, is greater than government purchases.

Basic

OBJ: factual

SEC: 1. Measuring GDP

TOP: Investment Expenditure and Government Purchases

MSC: Bloom's: Knowledge

In 2015, the exports of the United States exceeded its imports.

Basic

OBJ: factual

SEC: 1. Measuring GDP

TOP: Net Exports

MSC: Bloom's: Knowledge

In 2015, the imports of the United States were $516 billion higher than its exports.

Moderate

OBJ: factual

SEC: 1. Measuring GDP

TOP: Net Exports

MSC: Bloom's: Knowledge

The imports of the United States in 2010 were $20 million higher than its exports.

Moderate

OBJ: factual

SEC: 1. Measuring GDP

TOP: Net Exports

MSC: Bloom's: Knowledge

When there is a trade deficit, as a share of GDP, the sum of consumption, investment, and government purchases will be greater than 100 percent.

Moderate

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Net Exports

MSC: Bloom's: Analysis | AACSB: Analytic

Other things being equal, a decline in imports will be associated with an increase in GDP.

Moderate

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Net Exports

MSC: Bloom's: Analysis | AACSB: Analytic

Multiple Choice

In 2015, the labor income component of GDP was equal to

a.	$9.7 trillion.
b.	$97 billion.
c.	$9,700 million.
d.	$9,693 trillion.
e.	None of these

OBJ: factual

SEC: 1. Measuring GDP

TOP: GDP as Income

MSC: Bloom's: Knowledge

Which of the following statements is ?

a.	Rental payments are part of depreciation.
b.	Rental payments are part of labor income.
c.	Interest payments are part of depreciation.
d.	Profits are part of labor income.
e.	Rental payments are part of capital income.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Capital Income

MSC: Bloom's: Knowledge

Which of the following statements is ?

a.	Capital income is made up of profits, rental payments, and interest payments.
b.	Labor income is made up of wages, salaries, and fringe benefits.
c.	For purposes of measuring GDP, only net investment is counted.
d.	Labor income is greater than half of GDP.
e.	Net investment is the difference between gross investment and depreciation.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Income Approach

MSC: Bloom's: Knowledge

Which of the following statements is ?

a.	Investment expenditures included in the spending approach to GDP are equal to net investment.
b.	There is not much difference between gross and net investment.
c.	Net investment is usually larger than gross investment.
d.	Net investment is much lower than gross investment.
e.	None of these

OBJ: factual

SEC: 1. Measuring GDP

TOP: Net and Gross Investment

MSC: Bloom's: Knowledge

In calculating GDP as income, which of the following best describes what net investment is?

a.	A measure of how much new investment there is each year after depreciation is added
b.	A measure of how much new investment there is each year after depreciation has been subtracted
c.	A measure of how much new investment there is each year after the appropriate taxes and net exports are subtracted
d.	None of these is remotely related to a correct definition of net investment.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: GDP; Net Investment

MSC: Bloom's: Knowledge | AACSB: Analytic

Which of the following statements is ?

a.	Capital income includes sales taxes paid by businesses to the government.
b.	Capital income includes indirect business taxes.
c.	GDP includes indirect business taxes.
d.	GDP does not include indirect business taxes.
e.	None of these

OBJ: factual

SEC: 1. Measuring GDP

TOP: Indirect Business Taxes

MSC: Bloom's: Knowledge

The salary of a Japanese manager working in the United States is

a.	included in labor income.
b.	payment for services produced and is not included in GDP.
c.	not part of U.S. labor income.
d.	included in Japan's GDP.
e.	part of net exports.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Net Income of Foreigners

MSC: Bloom's: Analysis | AACSB: Analytic

If net exports are negative, spending by households, firms, and government must be greater than the income people earn in producing GDP.

Moderate

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Income Approach

MSC: Bloom's: Analysis | AACSB: Analytic

The difference between investment, the purchases of final goods by firms, and depreciation is called net investment.

Basic

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: GDP and Net Investment

MSC: Bloom's: Knowledge

Investment in the United States was about 27 percent of GDP in 2015.

Moderate

OBJ: factual

SEC: 1. Measuring GDP

TOP: GDP; Net Investment

MSC: Bloom's: Knowledge

GDP can be measured by adding up all the income people earn by producing new final goods and services.

Basic

OBJ: factual

SEC: 1. Measuring GDP

TOP: Income Approach

MSC: Bloom's: Knowledge

Profits include depreciation.

Moderate

OBJ: factual

SEC: 1. Measuring GDP

TOP: Depreciation

MSC: Bloom's: Knowledge

Multiple Choice

The concept of value added refers to

a.	the amount paid in the final sale of a product or service.
b.	the amount subtracted from the value of resources because of depreciation.
c.	the amount subtracted from the value of goods because of inflation.
d.	the increase in the value of a product that occurs at each stage of production.
e.	the total value of all intermediate goods used in the production of the final good.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Value Added

MSC: Bloom's: Comprehension

Value added can be determined by

a.	subtracting the cost of the intermediate goods from the price of the product at each stage of production.
b.	adding the income of all consumers during the year.
c.	summing the market values of all intermediate goods.
d.	calculating the percentage change in GDP from one year to the next.
e.	dividing GDP by the GDP price deflator.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Value Added

MSC: Bloom's: Knowledge

Exhibit 18-3

According to the data in Exhibit 18-3, the value added by the grocer is

a.	$1.25.
b.	$4.50.
c.	$.75.
d.	$2.00.
e.	$.50.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Value Added

MSC: Bloom's: Application | AACSB: Analytic

The total value added in Exhibit 18-3 is the same as

a.	the retail value of the loaf of bread minus the wholesale value of the bread.
b.	the wholesale value of the loaf of bread plus the final market value of the bread.
c.	the final retail price of the loaf of bread.
d.	the sum of all sales transactions.
e.	the value of the wheat before the miller turned it into flour.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Value Added

MSC: Bloom's: Application | AACSB: Analytic

According to the data in Exhibit 18-3, the contribution to GDP from the production of a loaf of bread is

a.	$2.00.
b.	$4.50.
c.	$1.25.
d.	$.75.
e.	$.50.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Value Added

MSC: Bloom's: Application | AACSB: Analytic

The spending approach to calculating GDP is the only approach in which double counting needs to be avoided.

Basic

OBJ: factual

SEC: 1. Measuring GDP

TOP: Value Added

MSC: Bloom's: Knowledge

To measure GDP using the production approach, it is necessary to add up the total value of the new goods and services produced in the economy for the given time period.

Basic

OBJ: factual

SEC: 1. Measuring GDP

TOP: Production Approach

MSC: Bloom's: Knowledge

When computing GDP using the production approach, one must count only the value added by each business, as opposed to the total value of output produced by each business, in order to avoid double counting.

Basic

OBJ: factual

SEC: 1. Measuring GDP

TOP: Production Approach

MSC: Bloom's: Knowledge

Short Answer

Answer the questions below:

(A)	What is GDP?
(B)	How are the different goods and services that make up GDP added together? Why is this the case?
(C)	A problem that arises when measuring GDP is that some goods are composed of other goods. What type of problem can this create when measuring GDP, and how is it avoided?

(A)	GDP is a measure of the value of all goods and services newly produced in a country during a given period of time.
(B)	GDP is a weighted average of the goods and services produced, where the weights are the prices of these goods and services. Since these prices reflect the cost and value of those goods or services, the goods and services included in GDP are weighted according to their cost or value to society.
(C)	The problem is double counting, and it is avoided by counting only final goods and not counting intermediate goods.

OBJ: factual

SEC: 1. Measuring GDP

TOP: GDP

MSC: Bloom's: Comprehension | Bloom's: Analysis | AACSB: Analytic

What are the three ways to measure GDP? Explain what they mean.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Three Ways To Measure GDP

MSC: Bloom's: Knowledge | AACSB: Communication

Explain how each of the following transactions would affect GDP for the current year. Which spending categories are affected?

(A)	Ford has 10,000 newly produced cars left over at the end of the year and adds them to its inventory.
(B)	The state of California repaves Highway 80.
(C)	The federal government decides to increase welfare payments.
(D)	You take a trip to Mexico for spring vacation.

(A)	The 10,000 cars are added to inventory investment, and GDP increases by the value of the 10,000 cars.
(B)	This is a government expenditure on a new good, so GDP will increase by the cost of the repaving.
(C)	This is a transfer payment that does not count in GDP.
(D)	This counts as consumption spending and import spending. Whatever you spend in Mexico does not count toward GDP.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Spending Approach

MSC: Bloom's: Application | AACSB: Analytic

Two components of investment expenditures are new homes purchased by consumers and increases in inventories. Explain why these two components are included in investment expenditures when calculating GDP using the spending approach.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Investment Expenditure

MSC: Bloom's: Analysis | AACSB: Analytic

Answer the questions below:

(A)	How does gross investment compare with investment spending as calculated by the spending approach?
(B)	How does net investment differ from gross investment? Is there a significant difference between gross and net investment?

(A)	Gross investment is the same as the investment-spending amount calculated using the spending approach. It is the purchase of final goods by firms (and new homes by consumers).
(B)	Net investment is gross investment less depreciation. Depreciation is the amount of spending required to replace worn-out plants and equipment in order to maintain capacity. Net investment only includes spending that adds to existing capacity. There is a big difference between net and gross investment. Net investment is approximately 25 percent of gross investment.

OBJ: factual

SEC: 1. Measuring GDP

TOP: Depreciation

MSC: Bloom's: Knowledge | AACSB: Analytic

For the hypothetical economy described in the table below, what were investment, consumption, and GDP in period 1? And for period 2?

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Inventory Investment

MSC: Bloom's: Application | AACSB: Analytic

For the economy described in the table below, what do net exports equal?

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Net Exports

MSC: Bloom's: Application | AACSB: Analytic

A soft-drink bottling company supplies six-packs of cola to retailers for $2.5 each. If the components in each six-pack cost the bottling company $1.50, how much value added per six-pack does the bottling company create?

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Value Added

MSC: Bloom's: Application | AACSB: Analytic

Consider the case of a hypothetical economy that has no government or foreign trade. This economy produces one final product, books. Moreover, there are only two stages of production, writing by authors and publishing by a single publishing company, Inco. In 2017, Inco produced $4 million worth of books, and consumers purchased $3 million of those books.

(A)	In 2017, for this economy, how much were C and I? How much was GDP? In 2010, Inco paid $500,000 to its workers, $200,000 in interest to its creditors, $300,000 for rent, and $2 million to its authors.
(B)	How much were Inco's profits in 2017?
(C)	How much value added was produced by the authors in 2017? How much value added was produced by Inco? What was the total value added produced in the economy that year?

(A)	C = $3 million, I = $1 million (inventory), GDP = $4 million.
(B)	Profits = $4 million  $.5 million  $.2 million  $.3 million  $.2 million = $1 million.
(C)	Value added by authors = $2 million.
	Value added produced by Inco = $4 million  $2 million = $2 million.
	Total value added produced was $2 million (value added produced by authors) + $2 million (value added produced by Inco) = $4 million.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Measuring GDP

MSC: Bloom's: Application | AACSB: Analytic

Assume a simple economy with no government and no foreign trade. The firm produces 100 units of output, sells 80 to consumers for a price of $1, and adds the remaining 20 to its inventory at a price of $0.75. Each unit costs $0.75 to produce, which is equal to the labor cost. There are no other costs associated with production.

(A)	Name three ways you could measure GDP from these data.
(B)	Show how you would perform each calculation.

(A)	GDP can be measured using the spending, income, or production approach.
(B)	For the spending approach, Y = C + I = 80  $1 + 20  $0.75 = $95.
	For the income approach, income = labor income plus profit = $0.75  100 + $0.25  80 = $95.
	For the production approach, the value of the output is $95.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Measuring GDP

MSC: Bloom's: Application | AACSB: Analytic

Multiple Choice

A measure of the amount of resources a country has available for investment, either in its own country or abroad, is known as

a.	total income.
b.	total amount of saving.
c.	GDP.
d.	consumption and taxes.
e.	consumption less taxes.

OBJ: factual

SEC: 2. Saving

TOP: Saving

MSC: Bloom's: Knowledge

The total amount of saving in an economy is a measure of the amount of resources that a country has available for investment, either in its own country or abroad.

Basic

OBJ: conceptual

SEC: 2. Saving TOP: Saving

MSC: Bloom's: Knowledge

Multiple Choice

National saving is defined as

a.	income less consumption and government purchases.
b.	income less consumption, government purchases, and investment.
c.	income less consumption.
d.	income less government purchases, investment, and net exports.
e.	income less consumption, government purchases, investment, and net exports.

OBJ: factual

SEC: 2. Saving

TOP: National Saving

MSC: Bloom's: Knowledge

National saving is defined as

a.	the amount of saving by businesses and households.
b.	the amount of saving by businesses.
c.	the amount of saving by households.
d.	the amount of saving by households and the government.
e.	the amount of saving by businesses and the government.

OBJ: factual

SEC: 2. Saving

TOP: National Saving

MSC: Bloom's: Knowledge

National saving equals

a.	Y  C  G  I  X.
b.	Y  C  G.
c.	Y  C + G.
d.	Y  C  G  I.
e.	Y  C.

OBJ: conceptual

SEC: 2. Saving

TOP: National Saving

MSC: Bloom's: Knowledge

Exhibit 18-4

Total Spending (billions of dollars)
	C	I	G	X
2015	3,906	737	1,099	–20
2016	4,140	797	1,132	–30

According to the data in Exhibit 18-4, 2015 national saving equaled ____.

a.	$717 billion
b.	$1,079 billion
c.	$737 billion
d.	$1,816 billion
e.	Not enough information is given.

OBJ: conceptual

SEC: 2. Saving

TOP: National Saving

MSC: Bloom's: Application | AACSB: Analytic

According to the data in Exhibit 18-4, national saving between 2015 and 2016 changed by

a.	$83 billion.
b.	$50 billion.
c.	0.
d.	$60 billion.
e.	Not enough information is given.

OBJ: conceptual

SEC: 2. Saving

TOP: National Saving

MSC: Bloom's: Application | AACSB: Analytic

Which of the following statements about dissaving is the most accurate?

a.	Dissaving occurs when people stop saving.
b.	Dissaving is more likely to occur among middle-aged people than among people in other age groups.
c.	Individuals are dissaving when the amount they consume plus their taxes exceeds their income.
d.	Dissaving only happens with the government.
e.	Dissaving only occurs with the young.

OBJ: conceptual

SEC: 2. Saving

TOP: Dissaving

MSC: Bloom's: Analysis | AACSB: Analytic

A government incurs a budget deficit when

a.	imports are greater than exports.
b.	exports are greater than imports.
c.	taxes are greater than government expenditure.
d.	taxes are less than government expenditure.
e.	None of these

OBJ: factual

SEC: 2. Saving

TOP: Budget Deficit

MSC: Bloom's: Knowledge

Government saving equals

a.	government purchases of goods and services plus transfer payments less taxes.
b.	taxes less government expenditures.
c.	transfer payments.
d.	taxes.
e.	government purchases of goods and services less taxes.

OBJ: factual

SEC: 2. Saving

TOP: Government Saving

MSC: Bloom's: Knowledge

When the difference between the receipts from taxes and government expenditures is positive,

a.	national saving is greater than private saving.
b.	national saving less net exports equals private saving.
c.	there is a budget deficit.
d.	national saving equals private saving.
e.	national saving is less than private saving.

OBJ: factual

SEC: 2. Saving

TOP: Government Saving

MSC: Bloom's: Knowledge

National saving is the sum of private and government saving.

Basic

OBJ: factual

SEC: 2. Saving

TOP: National Saving

MSC: Bloom's: Knowledge

A reduction in the government budget deficit reduces national saving.

Basic

OBJ: factual

SEC: 2. Saving

TOP: National Saving

MSC: Bloom's: Knowledge

Short Answer

Suppose you are given the following information about Country A:

(A)	Calculate Country A's GDP.
(B)	Which of the three approaches did you use to calculate GDP? Explain what information you would need to calculate GDP using the other two approaches.
(C)	Calculate national saving.
(D)	Calculate private saving.

(A)	GDP	= C + I + G + EX  IM
		= 700,000 + 350,000 + 250,000 + 350,000  300,000
		= 1,350,000
(B)	The spending approach was used. To use the production approach, you would need to add up the value added in the production of each new good and service. To use the income approach, you would need data on the different types of income earned (such as labor income and capital income) in the production of the new goods and services.
(C)	S = I + X = 350,000 + (350,000  300,000) = 400,000
(D)	National saving = private saving + government saving. Government saving = taxes  transfer payments  government purchases = 400,000  100,000  250,000 = 50,000. Therefore, private saving is 350,000.

OBJ: conceptual

SEC: 2. Saving

TOP: Saving, Investment, and Net Exports

MSC: Bloom's: Application | AACSB: Analytic

Multiple Choice

When there is inflation, the reliability of changes in GDP as an indicator of changes in production

a.	improves.
b.	is not affected.
c.	declines.
d.	is not affected, unless the change in prices is extreme.
e.	None of these

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: GDP as an Indicator of Production

MSC: Bloom's: Analysis | AACSB: Analytic

A measure of production that corrects for inflation is

a.	real GDP.
b.	nominal GDP.
c.	value added.
d.	the CPI.
e.	the GDP price deflator.

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: Real GDP

MSC: Bloom's: Knowledge

A measure of production that does not correct for inflation is

a.	real GDP.
b.	nominal GDP.
c.	value added.
d.	the CPI.
e.	the GDP price deflator.

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: Nominal GDP

MSC: Bloom's: Knowledge

Exhibit 18-5

	2016		2017
	Price	Quantity	Price	Quantity
Pineapples	2	100	4	125
Coconuts	5	60	4	75

According to the data in Exhibit 18-5, nominal GDP in 2016 equaled

a.	$500.
b.	$625.
c.	$640.
d.	$800.
e.	$900.

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Comparing Production in Two Years

MSC: Bloom's: Application | AACSB: Analytic

According to the data in Exhibit 18-5, nominal GDP in 2011 equaled

a.	$500.
b.	$800.
c.	$640.
d.	$625.
e.	$1,000.

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Comparing Production in Two Years

MSC: Bloom's: Application | AACSB: Analytic

Using 2016 prices, according to the data in Exhibit 18-5, production in 2017 equaled

a.	$1,000.
b.	$625.
c.	$500.
d.	$800.
e.	$640.

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Comparing Production in Two Years

MSC: Bloom's: Application | AACSB: Analytic

Using 2017 prices, according to the data in Exhibit 18-5, production in 2016 equaled

a.	$1,000.
b.	$500.
c.	$800.
d.	$625.
e.	$640.

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Comparing Production in Two Years

MSC: Bloom's: Application | AACSB: Analytic

If prices were kept constant at 2016 levels, then according to the data in Exhibit 18-5, production between 2016 and 2017 changed by

a.	20 percent.
b.	28 percent.
c.	25 percent.
d.	60 percent.
e.	30 percent.

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Comparing Production in Two Years

MSC: Bloom's: Application | AACSB: Analytic

If prices were kept constant at 2017 levels, then according to the data in Exhibit 18-5, production between 2016 and 2017 changed by

a.	25 percent.
b.	60 percent.
c.	28 percent.
d.	20 percent.
e.	30 percent.

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Comparing Production in Two Years

MSC: Bloom's: Application | AACSB: Analytic

According to the data in Exhibit 18-5, the increase in real GDP from 2016 to 2017 was

a.	22.5 percent.
b.	25 percent.
c.	40 percent
d.	24 percent.
e.	30 percent.

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Comparing Production in Two Years

MSC: Bloom's: Application | AACSB: Analytic

Refer to Exhibit 18-5. Suppose that real GDP increased 3 percent from 2015 to 2016 and increased 5 percent from 2016 to 2017. What was the average increase in real GDP from 2015 to 2017?

a.	4 percent
b.	3.5 percent
c.	4.5 percent
d.	3 percent
e.	5 percent

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Year-to-Year Chain

MSC: Bloom's: Application | AACSB: Analytic

A base year is a year when

a.	real GDP equals 100.
b.	nominal GDP equals 100.
c.	real and nominal GDP are equal to each other.
d.	there is no growth in real GDP.
e.	there is no growth in nominal GDP.

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: Base Year

MSC: Bloom's: Knowledge

The measure for GDP is reported in the United States every

a.	month.
b.	other month.
c.	two weeks.
d.	three months.
e.	six months.

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: GDP in United States

MSC: Bloom's: Knowledge

A rise in nominal GDP indicates that output has increased.

Basic

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: Nominal GDP

MSC: Bloom's: Knowledge

In the base year, nominal and real GDP are equal.

Basic

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: Base Year

MSC: Bloom's: Knowledge

Nominal GDP must always grow faster than real GDP.

Basic

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Real GDP vs. Nominal GDP

MSC: Bloom's: Analysis | AACSB: Analytic

Exhibit 18-6

	2016		2017
	Price	Quantity	Price	Quantity
Bananas	2	100	4	125
Sunscreen	5	60	4	75

Multiple Choice

According to the data in Exhibit 18-6, the GDP deflator in 2016 (the base year) was

a.	1.28.
b.	1.25.
c.	1.
d.	.8.
e.	1.30.

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: The GDP Deflator

MSC: Bloom's: Application | AACSB: Analytic

According to the data in Exhibit 18-6, using 2016 as the base year, the GDP price deflator in 2017 was

a.	8.
b.	1.25.
c.	1.28.
d.	0.78.
e.	1.30.

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: The GDP Deflator

MSC: Bloom's: Application | AACSB: Analytic

According to the data in Exhibit 18-6, using 2016 as the base year, prices rose

a.	25 percent.
b.	28 percent.
c.	40 percent.
d.	3 percent.
e.	30 percent.

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: The GDP Deflator

MSC: Bloom's: Application | AACSB: Analytic

If nominal GDP is $5 trillion, and the GDP price deflator is 1.25, what is real GDP?

a.	$0.4 trillion
b.	$6.25 trillion
c.	$625 trillion
d.	$4 trillion
e.	Not enough information is given.

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: The GDP Deflator

MSC: Bloom's: Application | AACSB: Analytic

The CPI is a measure of

a.	the price of all goods and services included in GDP.
b.	the price of final goods sold by producers.
c.	the price of consumer goods and services.
d.	the price of raw materials and intermediate goods.
e.	the price of domestically produced goods and services.

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: CPI

MSC: Bloom's: Knowledge

Which of the following statements is ?

a.	The CPI is based on a fixed quantity of goods and services in the base year.
b.	The CPI measures the price of all goods and services included in GDP.
c.	Services are excluded from the CPI.
d.	The CPI is a by-product of computing GDP.
e.	The CPI does not hold the quantity of goods and services constant when computing the price level.

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: CPI

MSC: Bloom's: Knowledge | AACSB: Analytic

In a hypothetical economy, a market basket consists of one laptop and two DVD players. In the base year, 2010, the price of a DVD player was $200, and the price of a laptop was $500. In 2015, the price of a DVD player was $380, and the price of a laptop was $750. The CPI for 2010 was

a.	1.00.
b.	CPI cannot be calculated with the given information.
c.	2.00.
d.	1.68.
e.	1.63.

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: CPI

MSC: Bloom's: Application | AACSB: Analytic

Exhibit 18-7

Item	2011 Quantity	2011 Price	2016 Price
Movie tickets	4	$5.00	$7.50
Starbucks Coffee	2	$3.00	$3.00
Cans of soda	4	$1.00	$1.50

The information in Exhibit 18-7 gives the 2011 base period market basket and prices used to construct the CPI for a small nation. It also has the 2016 prices. What is the value of the CPI for the base period 2011?

a.	1.33
b.	1.00
c.	0.71
d.	1.40
e.	1.25

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: CPI

MSC: Bloom's: Application | AACSB: Analytic

The information in Exhibit 18-7 gives the 2011 base period market basket and prices used to construct the CPI for a small nation. It also has the 2016 prices. What is the value of the CPI for the period 2016?

a.	1.00
b.	1.40
c.	1.33
d.	0.71
e.	1.25

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: CPI

MSC: Bloom's: Application | AACSB: Analytic

Which of the following statements is concerning the GDP deflator and the CPI as measures of inflation?

a.	Only the CPI shows the rise in inflation in the 1960s and the 1970s.
b.	Inflation, as measured by the GDP deflator, is more volatile than inflation as measured by the CPI.
c.	Only the GDP deflator shows the rise in inflation the 1960s and the 1970s.
d.	The CPI and the GDP deflator show similar movements in general inflation.
e.	Only the GDP deflator shows the decline in inflation in the 1980s and the early 1990s.

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: CPI and GDP Deflator

MSC: Bloom's: Knowledge | AACSB: Analytic

The chain-weighted price index measures the price of a fixed collection of goods and services, often referred to as a "market basket," relative to some base year.

Moderate

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: GDP Deflator

MSC: Bloom's: Knowledge

Over the past 20 years, the CPI values have been less volatile than the GDP deflator values for the U.S. rate of inflation.

Moderate

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: Measuring the Rate of Inflation

MSC: Bloom's: Knowledge

The CPI tends to understate inflation.

Basic

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: CPI

MSC: Bloom's: Knowledge

The CPI tends to overstate inflation because too little weight is placed on goods with rising prices and too much weight is placed on goods with falling prices.

Moderate

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: CPI

MSC: Bloom's: Analysis | AACSB: Analytic

Short Answer

How do the CPI and the GDP deflator differ?

OBJ: factual

SEC: 3. Measuring Real GDP

TOP: Measuring the Rate of Inflation

MSC: Bloom's: Knowledge | AACSB: Analytic

Why do economists believe that the CPI overstates the rate of inflation? Is this an important problem?

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Measuring the Rate of Inflation

MSC: Bloom's: Analysis | AACSB: Analytic

Suppose that real GDP grew more slowly than nominal GDP between year 1 and year 2. What must have happened to prices on average?

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Real GDP vs. Nominal GDP

MSC: Bloom's: Analysis | AACSB: Analytic

Suppose that real GDP grew faster than nominal GDP between year 1 and year 2. What must have happened to prices on average?

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Real GDP vs. Nominal GDP

MSC: Bloom's: Analysis | AACSB: Analytic

The figure below shows real and nominal GDP for a hypothetical economy between 2000 and 2015. Assume this economy had the same inflationary experience as the United States did over this period.

(A)	What year is the base year?
(B)	Which series is real GDP?
(C)	Prior to the base year, is real GDP greater than or less than nominal GDP? Why?

(A)	2010
(B)	A is real GDP.
(C)	Prior to the base year, real GDP is greater than nominal GDP. This is because the 2010 prices used to calculate real GDP are higher than the pre-2010 prices used to calculate nominal GDP.

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Real and Nominal GDP

MSC: Bloom's: Analysis | AACSB: Analytic

Exhibit 18-8

	2016		2017
	Price	Quantity	Price	Quantity
Speakers	$500	75	$750	100
Televisions	$200	100	$380	150

Suppose an economy's GDP consists only of speakers and televisions. Exhibit 18-8 shows the production of these goods in 2016 and 2017.

(A)	How much was nominal GDP in 2016?
(B)	How much was nominal GDP in 2017?
(C)	If 2010 was the base year, what was real GDP in 2017?
(D)	If 2011 was the base year, what was real GDP in 2016?

(A)	Nominal GDP in 2016 = $500  75 + $200  100 = $57,500.

(B)	Nominal GDP in 2017 = $750  100 + $380  150 = $132,000.

(C)	Using 2016 prices, GDP in 2017 = $500  100 + $200  150 = $81,000.

	Keeping prices constant at 2016 levels, the increase in GDP between 2016 and 2017 was equal to .

	Using 2017 prices, GDP in 2016 = $750  75 + $380  100 = $94,250.

	Keeping prices constant at 2017 levels, the increase in GDP between 2016 and 2017 was .

	The rate of growth in real GDP between 2016 and 2017 = .

	Because 2016 is the base year, real and nominal GDP in 2017 are the same. Real GDP in 2017= (1.40  $57,500) = $80,500.

(D)	Because 2017 is the base year, real and nominal GDP in 2017 are equal. Real GDP in 2016 =

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: Comparing Production

MSC: Bloom's: Application | AACSB: Analytic

According to the economy described in Exhibit 18-8, if 2016 is the base year, what was the GDP deflator in 2017?

OBJ: conceptual

SEC: 3. Measuring Real GDP

TOP: The GDP Deflator

MSC: Bloom's: Application | AACSB: Analytic

Multiple Choice

Which of the following statements is ?

a.	Some of the data needed for computing GDP come from the IRS.
b.	Revisions of GDP are inevitable.
c.	The statistics on GDP are frequently revised.
d.	Revisions in GDP can lead to mistakes.
e.	The data for GDP can be collected quickly.

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: Revisions of GDP

MSC: Bloom's: Knowledge

Which of the following statements is ?

a.	The statistics on GDP are frequently revised as new data are collected over the course of the year.
b.	Since the statistics on GDP are frequently revised, businesses and government officials rarely use the GDP data to make decisions.
c.	Since the statistics on GDP are frequently revised, the early reports on GDP are meaningless.
d.	The statistics on GDP are rarely revised because the government waits until all data have been collected to report the statistics on GDP.
e.	The statistics on GDP are rarely revised because most of the data about GDP are rarely revised.

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: Revisions of GDP

MSC: Bloom's: Knowledge

If a parent spends one hour each weekday transporting her children to school, this activity

a.	is not included in GDP because it is not productive.
b.	could be included in GDP if the parent reports this activity in his or her income taxes.
c.	is not included in GDP because it does not involve a market transaction.
d.	is included in GDP because statisticians know that this activity has to take place.
e.	is included in GDP if the school system does not provide transportation for these children.

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: Homework and Production

MSC: Bloom's: Application | AACSB: Analytic

The consumption of leisure

a.	is always omitted from GDP.
b.	is always included in GDP.
c.	is included in GDP if it involves productive activity.
d.	is omitted from GDP if the activity has no social use.
e.	is included in GDP if it involves a market transaction.

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: Leisure Activity

MSC: Bloom's: Knowledge

Which of the following best describes what is meant by the term underground economy?

a.	Economic activity that is not reported to the government
b.	Economic activity conducted by the homeless
c.	Illegal drug activity
d.	Economic activity associated with the shadier side of the economy
e.	Economic activity that is hard to classify

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: Underground Economy

MSC: Bloom's: Knowledge

GDP is a perfect measure of production because the government is able to account for all production of goods and services over the course of the year.

Basic

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: Revisions of GDP

MSC: Bloom's: Knowledge

To be included in GDP, an activity has to involve a market transaction.

Basic

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: Omissions from GDP

MSC: Bloom's: Knowledge

GDP is unaffected by changes in the quality of a good or service.

Moderate

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: Improved Products

MSC: Bloom's: Knowledge

Multiple Choice

Which of the following would not be captured by a perfect measure of the production of goods and services in the economy?

a.	The underground economy
b.	Improvements in goods and services
c.	A healthy life expectancy
d.	Home production
e.	None of these

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: Well-Being

MSC: Bloom's: Knowledge

The state of individual well-being affects the production of goods and services in the economy.

Basic

OBJ: conceptual

SEC: 4. Shortcomings of the GDP Measure

TOP: Other Measures of Well-Being

MSC: Bloom's: Knowledge

There is no correlation between the decline in certain forms of pollution over the past 40 years and the increase in real GDP per capita.

Moderate

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: Environmental Quality

MSC: Bloom's: Knowledge

Sho

Short Answer

List three points that need to be kept in mind when reading news stories about GDP.

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: GDP Each Month

MSC: Bloom's: Analysis | AACSB: Communication

Answer the questions below:

(A)	If a parent has to take the afternoon off from work to pick up his or her children from school and transport them to a friend's house, what happens to GDP?
(B)	If the parent hires a nanny to pick the children up and transport them to a friend's house, what will happen to GDP?
(C)	Are your answers to (A) and (B) the same? Explain.

(A)	GDP will not increase because child transportation in this case does not involve a market transaction. In fact, it is likely that GDP will decline because the parent took time off from work.
(B)	GDP will increase because hiring the nanny to do the transportation involves a market transaction.
(C)	The two answers differ because when the parent does the transportation there is no market transaction, whereas hiring the nanny does involve a market transaction.

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: Homework and Production

MSC: Bloom's: Analysis | AACSB: Analytic

Why are revisions of GDP inevitable? Why does it matter?

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: Revisions of GDP

MSC: Bloom's: Knowledge

Can real GDP per capita serve, by itself, as an adequate measure of individual well-being?

OBJ: factual

SEC: 4. Shortcomings of the GDP Measure

TOP: Measure of Well-Being

MSC: Bloom's: Knowledge | AACSB: Analytic

Please answer or and explain.

(A)	A new technology is discovered that results in all new cars producing 50 percent less pollution. People are better off because the air they breathe is cleaner, and hence GDP will increase to reflect the fact that people are better off.
(B)	A new technology is discovered that results in all new cars producing 50 percent less pollution. As a result, there is a reduction in the number of visits people make to the doctor to complain of breathing difficulties. People are better off because they are healthier, and hence GDP will increase to reflect the fact that people are better off.
(C)	A new technology is discovered that results in all new cars producing 50 percent less pollution. The federal government offers all people owning cars built before 1980 a $1,000 rebate on the purchase of a new car in an attempt to remove polluting cars from the road. One thousand people accept the offer and buy new cars worth $25 million. GDP increases by the value of the cars sold, which is $25 million, and the total amount of the government expenditure on the rebate program, which is $1 million.

(A)	False. While people would be better off because the air is cleaner, there is no direct increase in GDP as a result of the cleaner air since clean air is not a market good.
(B)	False. People are better off because they are healthier, but GDP will not increase as a direct result of the healthier population. In fact, GDP might even decrease because there are fewer doctor visits per year.
(C)	True. GDP will increase by the value of the new cars sold, which is $25 million. The $1 million rebate program expenditure is a transfer payment.

OBJ: conceptual

SEC: 4. Shortcomings of the GDP Measure

TOP: Other Measures of Well-Being

MSC: Bloom's: Analysis | AACSB: Analytic

Determine whether each of the following would be included in GDP, and explain why or why not.

(A)	You buy a used car from a friend.
(B)	You buy a used car at the local dealership.
(C)	You are an at-home parent and spend your day cleaning house, cooking meals, and caring for the children.
(D)	You hire a nanny to clean your house, cook your meals, and care for your children.

(A)	This does not count in GDP. Because your friend does not sell cars for a living, there is no new good or service being provided.
(B)	This does count in GDP. The local dealership provides a new service by making used cars available for people to purchase.
(C)	This does not count in GDP. This is not a market transaction, and there is no income earned.
(D)	This does count in GDP. The nanny will be paid for her services and will presumably report the income and pay taxes.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Real and Nominal GDP

MSC: Bloom's: Application | AACSB: Analytic

Determine in which spending category, if any, each of the following transactions would be recorded.

(A)	Ford sells a Thunderbird from its inventory.
(B)	Ford sells a Thunderbird that it produced this year to the state government.
(C)	The city of Dallas purchases computer paper for its employees from a local firm.
(D)	A business in Dallas purchases computer paper for its employees from a local firm.
(E)	Your grandmother wins $10 million in the lottery.
(F)	You purchase a newly constructed house.

(A)	Inventory investment will fall, and one of the other spending categories will rise by a similar amount depending on who purchased the car. If a consumer purchased the car, consumption would rise.
(B)	Government purchases will rise.
(C)	Government purchases will rise.
(D)	This is an intermediate good, so it does not directly affect any spending category.
(E)	This does not count in GDP, so no spending category is affected. This is a transfer of wealth between the people who bought the lottery tickets and the grandmother who won.
(F)	This is residential investment, which is part of investment.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Measures of GDP

MSC: Bloom's: Application | AACSB: Analytic

Suppose that, in response to a new government policy, some businesses are forced to go underground.

(A)	How will this affect the measure of GDP?
(B)	Will this change in GDP reflect a change in well-being?

(A)	The amount of GDP will be reduced.
(B)	Yes. People involved in underground economic activity cannot rely on the government to enforce property rights if there are disputes. In addition, if these businesses are illegal, there will be the anxiety associated with getting caught.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: The Underground Economy

MSC: Bloom's: Analysis | AACSB: Analytic

Examine the following data for a hypothetical centrally planned economy that subsequently freezes prices so that they are not allowed to change:

(A)	Assume that higher education and cereal are the only goods and services produced in this economy. Calculate GDP under the controlled prices and under market prices, assuming the quantities do not change. Did government-set prices result in an under- or overvaluation of production on the whole?
(B)	How do people value each good in relation to previously controlled prices?

(A)	When controlled prices are used to measure value, GDP is $250,000. When market prices are used to value output, GDP is $610,000. Government-set prices result in an undervaluation of output for this economy.
(B)	As indicated by the relative price, higher education is more valuable than the controlled prices indicated.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Prices as Weights

MSC: Bloom's: Application | AACSB: Analytic

Consider the following two scenarios for monthly inventories and sales for a company producing cereal. In both scenarios, the company's sales are the same.

In scenario A, the company maintains production at a constant level. In scenario B, the company adjusts production from month to month to try to match sales.

(A)	Calculate the inventory investment in each month and resulting stock of inventory at the beginning of the following month for both scenarios.
(B)	How does maintaining constant production affect the stock of inventory? Explain.

(A)



(B)	Constant production causes inventories to vary more because production does not match sales on a monthly basis. In scenario B, the company tries to predict sales and adjust production accordingly. Note that it is not always possible to exactly predict sales.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Inventory Investment

MSC: Bloom's: Application | AACSB: Analytic

Given the information in the table below for three consecutive years in the U.S. economy, calculate the missing data.

Year	Nominal GDP (billions of dollars)	Real GDP (billions of 2009 dollars)	GDP Deflator (2009=100)	Inflation (percent change in GDP deflator)	Population (millions)	Real GDP per Capita (2009 dollars)
2014	17,393.1	─	108.8	1.8	─	50,170
2015		16,397.2		1.1		51,098
2016	─	─	111.4	─	323,128	51,565

Year	Nominal GDP (billions of dollars)	Real GDP (billions of 2009 dollars)	GDP Deflator (2009=100)	Inflation (percent change in GDP deflator)	Population (millions)	Real GDP per Capita (2009 dollars)
2014	17,393.1	15,982.3	108.8	1.8	318,563	50,170
2015	18,036.7	16,397.2	110.0	1.1	320,897	51,098
2016	18,569.1	16,662.1	111.4	1.3	323,128	51,565

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Real and Nominal GDP

MSC: Bloom's: Application | AACSB: Analytic

Suppose there are only three goods in an economy:

Year	Item	Price	Quantity
2016	Tomatoes	$3/lb.	1,000 lbs.
	Squash	$1/lb.	600 lbs.
	Smartphones	$100	20

2017	Tomatoes	$4.50/lb.	900 lbs.
	Squash	$21/lb.	700 lbs.
	Smartphones	$125	30

(A)	Calculate nominal GDP for 2016 and 2017.
(B)	Calculate the percentage change in GDP from 2016 to 2017 using 2016 prices and 2017 prices.
(C)	Calculate the percentage change in real GDP from 2016 to 2017 using your answer from (B).
(D)	What is the GDP deflator for 2017 if it is equal to 1.0 in 2016?

(A)	Nominal GDP in 2016 and 2017 are $5,600 and $9,200, respectively.
(B)	The percentage change in GDP from 2016 to 2017 using 2016 prices is 14.28 percent. The percentage change in GDP from 2016 to 2017 using 2017 prices is 12.19 percent.
(C)	The percentage change in real GDP is the average of the two answers in part (B), 13.24 percent.
(D)	Real GDP in 2017 is 113.24 percent of 2016's GDP (1 + .1324)  $5,600 = $6,341.44.
	The GDP deflator for 2017 is .

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Nominal and Real GDP

MSC: Bloom's: Application | AACSB: Analytic

Use the following data for an ice-cream vendor at a local fair:

(A)	Calculate the vendor's value added.
(B)	Profits are revenue minus costs. Capital income consists of profits, rents, and interest. Show that the value added equals capital income plus labor income paid by the vendor.
(C)	Suppose that at a similar fair, the temperature is cooler and revenues fall to $1,500, but the prices of intermediate inputs, rental fees, and wages and salaries do not change. What happens to value added and profits in this case?

(A)	Value added is the value of the vender's output less the value of the intermediate goods. In this case it is revenue less the amount the vender had to pay for the ice cream: $1,800  $850 = $950.
(B)	In this example profits = revenue  costs = $1,800  $1,600 = $200.
	Rent = concession stand fee + truck rental fee = 300 + $100 = $400.
	Capital income = profits + rent = $200 + $400 = $600.
	Value added = capital income + wages and salaries = $600 + $350 = $950.
(C)	Value added falls to $650. Profit income is $100.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Value Added and the Income Approach

MSC: Bloom's: Application | AACSB: Analytic

Suppose that investment in the United States was about $130 billion and the trade deficit was $10 billion. How much was national saving in the United States? If the government budget surplus was $2 billion, how much total saving by consumers and businesses in the United States occurred?

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: The Budget and Trade Deficits

MSC: Bloom's: Application | AACSB: Analytic

Suppose that the following data explain the economic activity in a country in the year 2010.

Given these data, calculate the following:

(A)	Inventory investment
(B)	Net exports
(C)	Gross domestic product
(D)	Statistical discrepancy
(E)	National saving
(F)	Government saving
(G)	Verify that national saving equals investment plus net exports.

(A)	Inventory investment is $5 billion.

(B)	Net exports are $9 billion ($21 billion  $30 billion).

(C)	Using the spending approach:
	GDP = consumption + business fixed and residential investment + inventory investment + government purchases + exports  imports = 174 + 40 + 5 + 75 + 21  30 = $285 billion.

	Using the income approach:
	GDP = labor income + capital income + depreciation + indirect business taxes + net income of foreigners = 150 + 90 + 18 + 30 + 10 = $298 billion.

(D)	Statistical discrepancy = GDP using the income approach  GDP using the spending approach = $13 billion.

(E)	National saving = GDP  consumption  government purchases = 285  174  75 = $36 billion.

(F)	Government saving = government receipts  government outlays = 100  90 = $10 billion.

(G)	Investment + net exports = 45  9 = 36 = national saving = $36 billion.

OBJ: conceptual

SEC: 1. Measuring GDP

TOP: Saving, Investment, and Net Exports

MSC: Bloom's: Application | AACSB: Analytic

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Created Date:

Aug 21, 2025

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Chapter 6 Measuring The Production, Income, And Spending Of Nations

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Taylor

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