Test Bank Docx Measuring Total Output And Income Chapter 6 - Macroeconomics v3.0 Complete Test Bank by LibRittenberg. DOCX document preview.
Chapter 6: Measuring Total Output and Income
Multiple Choice
1. The value of an economy’s total output of goods and services is called _____.
A) consumption
B) investment
C) gross domestic product
D) exports
Difficulty: Easy
2. The gross domestic product of a nation can be measured:
A) as the total value of consumer expenditures on goods and services.
B) as the total value of income generated in producing total output.
C) as the total cost of producing of that output excluding profit
D) as the total value of inputs used to produce a nation’s output.
Difficulty: Easy
3. Of the following, which statistic do economists use to measure the business cycle?
A) Changes in the inflation rate
B) Changes in real gross domestic product
C) Changes in the value of imports
D) Changes in the implicit price deflator
Difficulty: Easy
4. In the long run, a country’s material standard of living is determined by:
A) the difference between its exports and imports.
B) the average level of prices and the average income of its population.
C) its output relative to its population.
D) the amount of money supply relative to its population.
Difficulty: Easy
5. Let C = consumption, I = private investment, G = government purchases, and Xn = net exports. Which of the following best represents the equation for GDP?
A) GDP = C+ I + G − Xn
B) GDP = C + I + G + Xn
C) GDP = C + I + G + net imports
D) GDP = C + I + G + tax revenues + Xn
Difficulty: Easy
6. GDP is the sum of:
A) personal consumption, private investment, government purchases, and imports.
B) personal consumption, private investment, government purchases, and net exports.
C) personal consumption, private investment, government purchases, and net imports.
D) personal consumption, private investment, government purchases, and foreign remittances.
Difficulty: Easy
7. What is the difference between a flow variable and a stock variable?
A) A stock variable is a variable that is measured over a specific period of time while a flow variable is a variable that is independent of time.
B) A flow variable is a variable that is measured in units of current prices while a stock variable is measured using prices from a base period.
C) A flow variable is a variable that is measured over a specific period of time while a stock variable is a variable that is independent of time.
D) A stock variable is a variable that is measured in units of current prices while a flow variable is measured using prices from a base period.
Difficulty: Easy
8. Which of the following is an example of a flow variable?
A) The balance in your checking account
B) The value of your stock portfolio
C) The amount of cash you have in your safe
D) The interest amount you pay on your auto loan
Difficulty: Medium
9. Which of the following is an example of a stock variable?
A) Your monthly utilities bill
B) The value of your stock portfolio
C) Your annual salary
D) The interest amount you pay on a mortgage
Difficulty: Medium
10. The gross domestic product of a nation:
A) is a flow variable.
B) is a stock variable.
C) could either be a flow variable or a stock variable depending on the time period considered.
D) could either be a flow variable or a stock variable depending on the share of personal consumption.
Difficulty: Easy
11. All of the following items are a flow variable EXCEPT _____.
A) a savings account balance
B) consumption expenditure
C) government purchases
D) gross private investment
Difficulty: Medium
12. Which of the following items is a stock variable?
A) Expenditure on consumer goods
B) Private investment
C) Labor wage
D) Government debt
Difficulty: Medium
13. The value of goods and services purchased by households during a particular period is called:
A) personal consumption.
B) private investment.
C) gross domestic purchases.
D) net imports.
Difficulty: Easy
14. Which of the following is counted as consumption expenditure?
A) A person buying a government bond
B) A person buying a toaster from your neighbor in a garage sale
C) A firm renting a two-storied building
D) A person buying a new car
Difficulty: Medium
15. Which of the following is NOT true of the circular model of the economy?
A) Personal consumption spending flows from households to firms.
B) The production of goods and services generates income for households.
C) Consumers finance their personal consumption spending by supplying factors of production to firms.
D) Payments to factors of production flows from households to firms.
Difficulty: Medium
Use the following to answer questions 16-21.
16. (Exhibit: Circular Flow Model) The exhibit shows a simplified circular flow model where only consumption goods are being produced. The arrow marked “A” represents the flow of:
A) personal consumption expenditures.
B) consumer goods and services.
C) factors of production.
D) factor incomes.
Difficulty: Easy
17. (Exhibit: Circular Flow Model) The exhibit shows a simplified circular flow model where only consumption goods are being produced. The arrow marked “B” represents the flow of:
A) factors of production.
B) factor incomes.
C) personal consumption expenditures.
D) consumer goods and services.
Difficulty: Easy
18. (Exhibit: Circular Flow Model) The exhibit shows a simplified circular flow model where only consumption goods are being produced. The arrow marked “C” represents the flow of:
A) factors of production.
B) factor incomes.
C) personal consumption expenditures.
D) consumer goods and services.
Difficulty: Easy
19. (Exhibit: Circular Flow Model) The exhibit shows a simplified circular flow model where only consumption goods are being produced. The arrow marked “D” represents the flow of:
A) factors of production.
B) factor incomes.
C) personal consumption expenditures.
D) consumer goods and services.
Difficulty: Easy
20. (Exhibit: Circular Flow Model) The exhibit shows a simplified circular flow model where only consumption goods are being produced. Which two flows represent your purchase of groceries from Safeway?
A) A and B
B) B and C
C) A and D
D) C and D
Difficulty: Medium
21. (Exhibit Circular Flow Model) The exhibit shows a simplified circular flow model where only consumption goods are being produced. Suppose you have been hired by an electronics store as a salesperson. Which of the following flows represents this transaction?
A) A and B
B) B and C
C) A and D
D) C and D
Difficulty: Medium
22. In the circular flow model for an economy that produces only consumption goods:
A) factor incomes flow from households to firms.
B) factors of production flow from households to firms.
C) factor incomes flow from households to firms and to the government.
D) factors of production flow from firms to households.
Difficulty: Medium
23. For computing GDP, the official measure of the value of all goods produced during a period for use in the production of other goods is called:
A) personal investment expenditure.
B) a capital consumption allowance.
C) a transfer payment.
D) gross private domestic investment.
Difficulty: Easy
24. Which of the following items would NOT be a part of private investment in the computation of GDP?
A) A new factory building
B) New factory equipment
C) A rise in inventory levels at a firm
D) An old shopping center acquired by a firm
Difficulty: Easy
25. Which of the following is included in gross private domestic investment in the computation of GDP?
A) The sale of some Safeway stocks to another company
B) Safeway’s purchase of three new delivery trucks
C) Your purchase of groceries at Safeway
D) An annual bonus given to Safeway employees
Difficulty: Medium
26. Gross private domestic investment includes purchases of:
A) government T-bills.
B) existing residential housing.
C) company stocks.
D) new factory equipment.
Difficulty: Medium
27. Which of the following items is included in gross private domestic investment?
A) An increase in the level of government spending on new schools
B) The purchase of medical equipment by the Marines for use in its field hospitals
C) An increase in business inventories
D) An increase in the value of corporate stocks sold during the year
Difficulty: Medium
28. Goods that are produced in a particular period but not sold in the current period:
A) are included in consumption estimates.
B) are called inventories and are included in gross private investment.
C) are excluded from the current year’s GDP and included in GDP in the year they are sold.
D) are classified as intermediate goods.
Difficulty: Easy
29. Thames Patio Solutions is a manufacturer of patio umbrellas. In 2007, its inventory increases by 170 umbrellas. In 2008, it sells all the 170 umbrellas. Which of the following can be inferred in this case?
A) The value of the increased inventory will be counted as part of GDP in 2007, and the value of the 170 umbrellas sold in 2008 will not cause GDP in 2008 to increase.
B) The value of the increased inventory will not affect GDP in 2007, but the sale of the umbrellas will cause GDP in 2008 to increase.
C) The value of the increased inventory will be counted as part of GDP in 2007 and the value of the 170 umbrellas sold in 2008 will cause GDP in 2008 to increase.
D) Since the umbrellas were not sold in 2007, they will not be included as part of GDP in 2007, and since they were not produced in 2008, they will not be included as part of GDP in 2008. This is a shortcoming of GDP computations.
Difficulty: Medium
30. Suppose the clothing manufacturer, Eddie Bauer, produced 10,000 pairs of jeans in 2005 but sold only 9,200 pairs. How will this be recorded in GDP accounts?
A) The 9,200 pairs that were sold will be counted under the consumption component of GDP in 2005 and the 800 pairs that were not sold will not be included in GDP.
B) The 10,000 pairs of jeans produced would be counted as investment and will be included in GDP in 2005.
C) The 9,200 pairs sold will be counted as consumption and the 800 pairs that were not sold will counted as investment and both items will be included in GDP in 2005.
D) The 9,200 pairs sold will be counted under the consumption component of GDP in 2005 and the 800 pairs that were not sold will be included in GDP in 2006.
Difficulty: Medium
31. In the calculation of GDP, the value of a new house constructed by a firm is included in:
A) personal consumption expenditures.
B) personal saving.
C) the depreciation of capital.
D) private investment.
Difficulty: Medium
32. Which of the following statements is true?
A) Capital and gross private investment are flow variables.
B) Capital and gross private investment are stock variables.
C) Capital is a stock variable while gross private investment is a flow variable.
D) Capital is a flow variable while gross private investment is a stock variable.
Difficulty: Easy
33. Private investment plays a crucial role in the macroeconomy because it is:
A) the largest expenditure component of GDP.
B) the smallest expenditure component of GDP.
C) an expenditure that adds to the economy's productive capacity.
D) undertaken by the government and must be funded by tax revenue.
Difficulty: Easy
34. Government purchases include:
A) purchases made by people working in government organizations.
B) the total value of output produced by government agencies.
C) investments made by foreign public agencies.
D) transfer payments.
Difficulty: Medium
35. The construction of a new state highway would be included in the _____ category of GDP.
A) personal consumption
B) government purchases
C) government output
D) government investment
Difficulty: Medium
36. Government purchases are defined as:
A) the sum of purchases of goods and services from firms by government agencies and the total value of output produced by government agencies.
B) the sum of purchases of goods and services from firms by the government and the value of transfer payments made to government to its citizens.
C) the sum of purchase of final goods and service from firms by government agencies and the payment of interests on loans undertaken by the government.
D) the purchase of final goods and service from firms by government agencies excluding the value of output produced by government agencies.
Difficulty: Easy
37. Transfer payments are:
A) payments made to firms for investment.
B) payments that do not require a good or service in exchange.
C) considered a part of government purchases.
D) an important component of GDP because they increase consumption spending.
Difficulty: Easy
38. Transfer payments are:
A) payments made to certain individuals and are part of GDP.
B) not included in GDP because they do not represent income derived from current production.
C) included in GDP only if they pertain to unemployment benefits.
D) payments for services produced in the current time period.
Difficulty: Easy
39. Which of the following is an example of a transfer payment?
A) The President's salary
B) A payment for a gambling debt
C) A barber's income
D) A pension payment to retired military personnel
Difficulty: Medium
40. Social Security payments to U.S. citizens are considered:
A) transfer payments and are included in GDP.
B) transfer payments and are not included in GDP.
C) income and are included in GDP.
D) income and are not included in GDP.
Difficulty: Easy
41. GDP does NOT include _____.
A) government purchases
B) investment by firms
C) consumption spending
D) transfer payments
Difficulty: Easy
42. Goods and services produced abroad and sold in the domestic economy are called _____.
A) net exports
B) exports
C) imports
D) transfer payments
Difficulty: Easy
43. Goods and services produced in the domestic economy and sold abroad are called _____.
A) net exports
B) exports
C) imports
D) transfer payments
Difficulty: Easy
44. The purchases of U.S. products by the citizens of Mexico are:
A) counted as U.S. exports.
B) counted as U.S. imports.
C) considered Mexico’s exports.
D) considered as an income transfer from the U.S. to Mexico.
Difficulty: Easy
45. A country’s exports minus its imports measures:
A) net exports.
B) gross exports.
C) net imports.
D) gross imports.
Difficulty: Easy
46. A nation records a trade surplus when:
A) foreign remittances paid are more than foreign remittances received.
B) net exports are positive.
C) imports are greater than exports.
D) net exports equal zero.
Difficulty: Easy
47. A trade deficit occurs when:
A) foreign remittances paid are less than foreign remittances received.
B) exports are less than imports.
C) exports equal imports.
D) exports are greater than imports.
Difficulty: Easy
Use the following to answer questions 48-51.
Exhibit: The Circular Flow for the United States
48. (Exhibit: The Circular Flow for the United States) The purchase of a new tractor by Farmer Brown is:
A) classified as gross private investment and the flow is represented by 5.
B) classified as gross private investment and the flow is represented by 2.
C) classified as consumption and the flow is represented by 5.
D) classified as consumption and the flow is represented by 1.
Difficulty: Medium
49. (Exhibit: The Circular Flow for the United States) Washington State purchases four airplanes from Boeing. This expenditure falls under the:
A) gross private investment category and the flow is represented by 2.
B) government purchases category and the flow is represented by 2.
C) gross private investment category and the flow is represented by 3.
D) government purchases category and the flow is represented by 3.
Difficulty: Medium
50. (Exhibit: The Circular Flow for the United States) John, a resident of the U.S., buys a new set of golf clubs from a U.S. firm. This transaction is part of:
A) personal consumption expenditures and the flow is represented by 1.
B) personal consumption expenditures and the flow is represented by 5.
C) private investment expenditure and the flow is represented by 1.
D) private investment expenditure and the flow is represented by 5.
Difficulty: Medium
51. (Exhibit: The Circular Flow for the United States) A New York restaurant purchases 1,000 cases of wine from a winery in France. This transaction is recorded as part of:
A) gross private investment and the flow is represented by 2.
B) net exports and the flow is represented by 4.
C) consumption expenditure and the flow is represented by 1.
D) consumption expenditure and the flow is represented by 4.
Difficulty: Medium
52. The largest expenditure category in U.S. GDP in 2011 was:
A) government purchases.
B) personal consumption.
C) net exports.
D) gross private domestic investment.
Difficulty: Easy
Use the following to answer questions 53-54.
Exhibit: Components of GDP for an Economy 1
Value (in billions) | |
Personal consumption expenditures | $1,000 |
Gross private domestic investment | $500 |
Net exports | $300 |
Imports | $180 |
Government purchases of goods and services | $280 |
Transfer Payments | $90 |
53. (Exhibit: Components of GDP for an Economy 1) What is the value of GDP?
A) $1,820 billion
B) $2,170 billion
C) $2,080 billion
D) $2,550 billion
Difficulty: Medium
54. (Exhibit: Components of GDP for an Economy 1) What is the total value of government purchases of goods and services?
A) $570 billion
B) $280 billion
C) $370 billion
D) $190 billion
Difficulty: Medium
55. (Exhibit: Components of GDP for an Economy 1) What is the value of exports?
A) −$120 billion
B) $120 billion
C) −$480 billion
D) $480 billion
Difficulty: Medium
56. Which of the following is the best example of a final good or service?
A) Crude oil in an oil well
B) Gasoline purchased by Exxon for its gas stations
C) A song you downloaded for a fee from Amazon.com
D) Retail floor space at a suburban shopping mall
Difficulty: Medium
57. Which of the following is an expenditure component of GDP?
A) Income from interest
B) Indirect business taxes
C) Capital consumption allowance
D) Personal consumption
Difficulty: Medium
Use the following to answer questions 58-61.
Exhibit: Components of GDP for an Economy 2
Value (in billions) | |
Personal consumption expenditures | $500 |
Gross private domestic investment | $400 |
Social Security payments to households | $60 |
Unemployment benefits | $32 |
Government purchases of goods and services | $100 |
Imports | $180 |
Net exports | −$50 |
58. (Exhibit: Components of GDP for an Economy 2) What is the value of GDP?
A) $1,010 billion
B) $1,060 billion
C) $950 billion
D) $210 billion
Difficulty: Medium
59. (Exhibit: Components of GDP for an Economy 2) What is the value of government purchases of goods and services?
A) $100 billion
B) $160 billion
C) $300 billion
D) $192 billion
Difficulty: Medium
60. (Exhibit: Components of GDP for an Economy 2) What is the value of exports?
A) $130 billion
B) −$130 billion
C) $230 billion
D) −$230 billion
Difficulty: Medium
61. (Exhibit: Components of GDP for an Economy 2) Net exports are negative. This would mean that:
A) imports are larger than exports and there is a trade surplus.
B) exports are larger than imports and there is a trade surplus.
C) imports are larger than exports and there is a trade deficit.
D) exports are larger than imports and there is a trade deficit.
Difficulty: Easy
62. The gross domestic product of an economy is defined as the:
A) total value of all industrial goods produced and sold during a given period.
B) total value of all final goods and services produced during a given period.
C) value of all noneconomic transactions made among consumers during a particular period.
D) value of all non-monetary transactions between consumers and firms during a given period.
Difficulty: Easy
63. The total volume of sales in an economy is much larger than the value of GDP because:
A) GDP understates the value of total output.
B) the output approach to measuring GDP excludes intermediate transactions.
C) GDP includes transfer payments.
D) total sales include sales to foreign countries but GDP excludes sale of output to foreign countries.
Difficulty: Medium
64. The amount by which the value of a firm’s output exceeds the value of the goods and services that the firm purchases from other firms is called _____.
A) profit
B) value added
C) the markup rate
D) the marginal product
Difficulty: Easy
65. Value added is defined as:
A) the value of productivity gains that arise when a firm increases its capital-labor ratio.
B) the difference between the total cost of production of a product and the total revenues earned from the sale of the product.
C) the amount by which the value of a firm’s final output exceeds the total value of the intermediate goods and services used to produce the good.
D) the cost savings that a firm enjoys when it reduces the cost of its resources by employing a more efficient production method.
Difficulty: Easy
66. Which of the following is an example of an intermediate good or service?
A) The purchase of a new yacht by a boating enthusiast
B) The purchase of lumber by a construction company
C) The salaries paid to military personnel
D) The salary earned by a construction worker
Difficulty: Medium
67. If we sum up the value added at every stage of production of a good, we will get:
A) the total cost of the labor used to produce the good.
B) the prices of the factors of production used to produce the good.
C) the final value of the good.
D) the capital-labor ratio.
Difficulty: Easy
68. GDP can be calculated by totaling either the:
A) market values of all final goods and services or the total volume of all intermediate goods at all stages of production.
B) market values of all final goods and services or the value added at all stages of production.
C) total sales values of all intermediate goods at all stages of production or the value added at all stages of production.
D) market values of all final goods and services or the values added by labor at all stages of production.
Difficulty: Easy
69. Double counting in GDP accounting:
A) refers to the fact that accountants check their figures twice.
B) refers to the inclusion of both intermediate goods and final goods in GDP.
C) is the method of using both income and expenditures in measuring GDP.
D) is the method of calculating the GDP by including the net incomes received by residents of a nation living abroad.
Difficulty: Easy
Use the following to answer questions 70-74.
Exhibit: Stages of Production of Toy Model Airplanes
Stages of Production | Sales Value |
Extracting crude oil | $5 |
Refining the oil | $8 |
Making plastic | $10 |
Making the model airplane | $16 |
Distributing the model airplane to retailer | $17 |
Selling the model airplane to customer | $21 |
70. (Exhibit: Stages of Production of Toy Model Airplanes) The final value of a model airplane is _____.
A) $5
B) $21
C) $56
D) $77
Difficulty: Medium
71. (Exhibit: Stages of Production of Toy Model Airplanes) The total value added in the production of a model airplane is _____.
A) $16
B) $17
C) $21
D) $77
Difficulty: Medium
72. (Exhibit: Stages of Production of Toy Model Airplanes) The total sales value of all transactions involved in the production of a model airplane is _____.
A) $5
B) $21
C) $56
D) $77
Difficulty: Hard
73. (Exhibit: Stages of Production of Toy Model Airplanes) The value added by the extraction of the crude oil is _____.
A) $2
B) $3
C) $4
D) $5
Difficulty: Medium
74. (Exhibit: Stages of Production of Toy Model Airplanes) The value added by the sale of a model airplane to the customer is _____.
A) $2
B) $3
C) $4
D) $5
Difficulty: Medium
75. The gross national product (GNP) of the U.S. measures:
A) the market value of final goods and services sold in the U.S. during a particular period.
B) the market value of final goods and services produced using factors of production owned by U.S. residents during a particular period.
C) the market value of goods and services produced anywhere in the world, by U.S. citizens and foreigners residing in the U.S. during a particular period.
D) the market value of goods and services produced in the U.S. by foreigners residing in the U.S. during a particular period.
Difficulty: Easy
76. Which of the following statements about GNP is correct?
A) It measures the market value of all goods and services, both final and intermediate, produced by resources located within a nation regardless of who owns those resources.
B) It measures the market value of all goods and services, both final and intermediate, produced by residents and firms regardless of the location of production.
C) It measures the market value of all final goods and services produced by residents and firms of a nation regardless of the location of production.
D) It measures the market value of all final goods and services produced by resources located within a nation regardless of who owns those resources.
Difficulty: Easy
77. The value of GDP differs from the value of GNP because:
A) net exports are excluded from GDP but included in GNP.
B) production in a country usually employs factors of production owned by residents of other countries.
C) production in a country employs only factors of production owned by its residents.
D) government purchases are excluded from GDP but included in GNP.
Difficulty: Medium
78. Pfeister Inc., a firm located in New York, is a German manufacturer of heavy-duty glass doors. It uses glass-cutting machinery imported from Germany in production. The firm’s output of glass doors will be counted in:
A) U.S. GDP.
B) U.S. domestic private investment.
C) Germany’s GDP.
D) Germany’s net exports.
Difficulty: Medium
79. A resident of San Diego, California, owns and operates a garage across the U.S.-Mexican border in Tijuana, Mexico. The value of the garage services produced at the shop would be counted in _____.
A) U.S. GNP
B) Mexico’s GNP
C) U.S. GDP
D) U.S.’s net exports
Difficulty: Medium
80. China’s gross national product can be calculated from China’s GDP by:
A) adding the value of output produced by China’s residents and sold abroad.
B) adding the income earned by China’s residents from the rest of the world and subtracting payments made by China’s residents to the rest of the world.
C) subtracting the value of output produced by China’s residents and sold abroad.
D) subtracting the income earned by China’s residents from the rest of the world and adding payments made by China’s residents to the rest of the world.
Difficulty: Medium
81. To estimate the value of U.S. GDP from U.S. GNP, we must:
A) add the value of output produced by U.S. residents and sold abroad.
B) add the income earned by U.S. residents from the rest of the world and subtract payments made by U.S. residents to the rest of the world.
C) subtracting the value of output produced by U.S. residents and sold abroad.
D) subtract the income earned by U.S. residents from the rest of the world and add payments made by U.S. residents to the rest of the world.
Difficulty: Medium
82. Vikram, an Indian national working for Microsoft in New York, sends $300 every month to his elderly parents who live in Bangalore, India. This activity will:
A) increase India’s GNP and decrease U.S. GNP.
B) decrease U.S. GNP but does not affect U.S. GDP.
C) increase U.S. GNP and India’s GNP.
D) not affect the GDP or GNP of either country.
Difficulty: Easy
83. When would an economist focus on GNP rather than GDP?
A) When the economist wants a more accurate measure of production, since GNP data are typically much more precise than GDP data
B) When the economist wants to study consumption, since consumption expenditures are weighted more heavily in GNP than in GDP
C) When the economist wants to measure total income earned or total amount of factors of production supplied by the residents of a country
D) When the economist wants a measure of output that includes depreciation, because GDP omits depreciation in its calculations
Difficulty: Medium
84. Suppose that in the country of Welworth, most residents supply factors of production to foreign firms, while producers in Welworth never employ factors owned by residents of other countries. Which of the following statements is true of the economy of Welworth?
A) Welworth’s GDP is greater than its GNP.
B) Welworth’s GDP is less than its GNP.
C) Both GDP and GNP are about the same in Welworth.
D) Welworth’s GDP exceeds GNP by an amount equal to depreciation plus indirect business taxes.
Difficulty: Medium
Use the following to answer questions 85 and 86.
Exhibit: Output and Income Data for the Economy of Argonia
Item | Value (in billions) |
Gross domestic product | $1,000 |
Earnings received by residents from foreign producers | $200 |
Payments by domestic producers to foreign owners of factors of production | $100 |
85. (Exhibit: Output and Income Data for the Economy of Argonia) What is the value of the net income Argonia has received from other countries?
A) −$100 billion
B) $1,100 billion
C) $100 billion
D) $200 billion
Difficulty: Medium
86. (Exhibit: Output and Income Data for the Economy of Argonia) What is the value of Argonia’s gross national product?
A) $900 billion
B) $1,000 billion
C) $1,100 billion
D) $1,200 billion
Difficulty: Medium
87. What is a value-added tax (VAT)?
A) It is essentially a tax on profits earned by firms from the sale of goods and services.
B) It is a tax placed on a product whenever value is added at a stage of production and at final sale.
C) It is a tax imposed on those who supply factors of production, such as the payroll tax.
D) It is a tax imposed on luxury goods to generate additional revenue for the government.
Difficulty: Easy
Use the following to answer questions 88-91.
Exhibit: Stages in the Production of an Office Building
Producer | Item | Sales Value |
Acme Mining | Iron ore | $100,000 |
Fuller Mill | Steel | $225,000 |
Crane Construction | Building | $950,000 |
88. (Exhibit: Stages in the Production of an Office Building) A mining firm extracts iron from the earth. A steel mill converts the iron to steel beams for use in construction. A construction company uses the steel beams to make a building. Assume that the total product of these firms represents the only components of the building and that they will have no other uses. What is the value added by Fuller Mill?
A) $325,000
B) $225,000
C) $125,000
D) $100,000
Difficulty: Medium
89. (Exhibit: Stages in the Production of an Office Building) A mining firm extracts iron from the earth. A steel mill converts the iron to steel beams for use in construction. A construction company uses the steel beams to make a building. Assume that the total product of these firms represents the only components of the building and that they will have no other uses. Suppose the value added tax is 10%. What is the amount paid by Fuller Mill to Acme Mining?
A) $100,000
B) $110,000
C) $215,000
D) $225,000
Difficulty: Hard
90. (Exhibit: Stages in the Production of an Office Building) A mining firm extracts iron from the earth. A steel mill converts the iron to steel beams for use in construction. A construction company uses the steel beams to make a building. Assume that the total product of these firms represents the only components of the building and that they will have no other uses. What is the valued-added by Crane Construction?
A) $725,000
B) $825,000
C) $950,000
D) $1,050,000
Difficulty: Medium
91. (Exhibit: Stages in the Production of an Office Building) A mining firm extracts iron from the earth. A steel mill converts the iron to steel beams for use in construction. A construction company uses the steel beams to make a building. Assume that the total product of these firms represents the only components of the building and that they will have no other uses.
Suppose the value-added tax is 10%. What is the amount paid by Crane Construction to Fuller Mill?
A) $825,000
B) $725,000
C) $247,500
D) $225,000
Difficulty: Hard
92. (Exhibit: Stages in the Production of an Office Building) A mining firm extracts iron from the earth. A steel mill converts the iron to steel beams for use in construction. A construction company uses the steel beams to make a building. Assume that the total product of these firms represents the only components of the building and that they will have no other uses. Suppose the value-added tax is 10%. What is the total VAT collected from all stages of production including final sale?
A) $1,050,000
B) $127,500
C) $95,000
D) $72,500
Difficulty: Hard
93. Which of the following is an advantage of a value added tax (VAT) compared to a final tax on retail sales?
A) The VAT may lead to higher revenue collected because even if no sales takes place, the government collects tax revenue at earlier stages of production.
B) The VAT is a more equitable tax system because the tax burden is shared by every participant in the production process and by the final consumer.
C) The VAT encourages productive behavior because each producer bears a smaller portion of the total tax imposed on a product.
D) The VAT reduces a nation’s trade deficit.
Difficulty: Easy
94. Gross domestic income (GDI) is defined as:
A) the income of all the workers in an economy who have provided human capital in the production process during a particular period.
B) the income of all workers in the private sector of an economy during a particular period.
C) the total income generated in an economy by the production of final goods and services during a particular period.
D) the total non-wage benefits of all the workers in private sector.
Difficulty: Easy
95. The equality between GDP and GDI in an economy implies that the income generated by final goods and services is equal to:
A) expenditures on intermediate goods and services.
B) gross private domestic investment.
C) the total value of final goods and services produced.
D) total wages and other employee compensation.
Difficulty: Easy
96. The value of income generated by the production of a given value of final goods and services is called:
A) gross domestic income.
B) net factor output.
C) net foreign factor income.
D) gross personal product.
Difficulty: Easy
97. In GDP accounting, the value of the total final output in a given period equals the value of the:
A) total income generated by the production of final goods and services in that period.
B) net revenue earned from the sales of intermediate goods and services during that period.
C) total profit earned by firms involved in the production of the output during that period.
D) total inputs used in the production of the final output in that period.
Difficulty: Easy
98. The components of gross domestic income include:
A) employee compensation, profits, transfer payments, and net interest.
B) employee compensation, profits, rental income, and net interest.
C) wages and salaries, interest income, gross private investment, and depreciation.
D) wages and salaries, interest income, transfer payments, and indirect business taxes.
Difficulty: Easy
99. The cost of producing goods and services includes:
A) only the cost of the factors of production used to produce output.
B) the cost of factors of production and depreciation but excludes sales tax.
C) the cost of factors of production, depreciation, and other production-related taxes.
D) the cost of the inputs used to produce the product, all production-related taxes, and profit.
Difficulty: Easy
100. All of the following are included in gross domestic income EXCEPT:
A) wages.
B) welfare payments.
C) net interest.
D) rental income.
Difficulty: Easy
101. The largest component of factor income in the U.S. is:
A) rental income.
B) profits.
C) employee compensation.
D) consumption.
Difficulty: Easy
102. In the U.S., since the 1950s, the share of employee benefits as a percentage of total employee compensation:
A) has been increasing.
B) has been decreasing.
C) has been relatively stable.
D) has remained the same but has fallen in dollar terms.
Difficulty: Easy
103. Executive salaries and bonuses are included in gross domestic income under:
A) employee compensation.
B) rental income.
C) net interest.
D) profits.
Difficulty: Easy
104. The income earned by those who supply entrepreneurial talent is/are called:
A) wages and salaries.
B) profits.
C) stock options.
D) net interest.
Difficulty: Easy
105. The smallest component of income generated in the production of U.S. GDP is:
A) depreciation.
B) net interest.
C) rental income.
D) employee compensation.
Difficulty: Easy
106. A measure of the degree to which capital wears out or becomes obsolete during a period is:
A) rent.
B) production costs.
C) deferred expenditure.
D) depreciation.
Difficulty: Easy
107. Taxes imposed on firms on the production or sale of goods and services are called:
A) output tax.
B) profit tax.
C) direct business taxes.
D) indirect business taxes.
Difficulty: Easy
108. Which of the following is an example of an indirect business tax?
A) Consumption tax
B) Corporate profit tax
C) Personal income tax
D) Excise tax
Difficulty: Easy
109. If your ticket wins the lottery, the earnings you receive:
A) raises GDI but does not affect GDP.
B) increases both GDI and GDP.
C) raises both GDI and GNP.
D) does not affect GDI or GNP.
Difficulty: Medium
110. Net national product equals:
A) gross national product plus depreciation.
B) gross national product minus depreciation.
C) gross domestic product minus gross national product.
D) gross national product minus taxes.
Difficulty: Easy
111. Which of the following is an example of income earned but not received?
A) Social security payroll taxes
B) Farm subsidies
C) Net factor earnings from abroad
D) Disposable income
Difficulty: Medium
112. Disposable personal income is that part of income that households:
A) have available to spend on goods and services.
B) earn by selling factors of production.
C) have after paying taxes and purchasing consumption goods.
D) save after consumption and investment.
Difficulty: Easy
113. Disposable personal income is calculated as personal income:
A) adjusted for inflation.
B) minus depreciation.
C) minus taxes.
D) plus transfer payments.
Difficulty: Easy
114. Suppose the personal income in a nation equals $5 billion, and personal income taxes equal
$1 billion. The disposable personal income equals:
A) $4 billion.
B) $5 billion.
C) $6 billion.
D) $1 billion.
Difficulty: Easy
115. Personal income equals:
A) net national product plus income earned but not received plus income received but not earned.
B) wages and salaries plus net interest income plus transfer payments.
C) national income minus income earned but not received plus income received but not earned.
D) factor incomes received for supplying factors of production plus income received but not earned.
Difficulty: Easy
116. For a given level of GDP, an increase in net factor earnings from abroad will:
A) increase gross national product.
B) reduce gross national product.
C) not affect disposable personal income.
D) increase a nation’s trade surplus.
Difficulty: Medium
117. For a given level of GDP, an increase in depreciation will
A) increase gross domestic product.
B) reduce net national product.
C) not affect disposable personal income.
D) increase savings and reduce consumption expenditures.
Difficulty: Medium
118. In reality, the GDP–GDI gap for the United States
A) is due to the presence of substantial black market activity.
B) is due to different accounting standards among countries in the world.
C) represents a small fraction of measured activity.
D) represents the impact of transfer payments.
Difficulty: Easy
119. Which of the following is a reason for the discrepancy between GDP and GDI?
A) GDP is measured from a sample of household figures while GDI is measured from tax returns filed by firms and households.
B) The sample size used to estimate these figures is very large leading to more statistical errors.
C) GDP is estimated using estimated sales provided by business while GDI is based on actual expenditures incurred by households.
D) GDP is measured from sales and inventory figures collected from a sample of business while GDI is collected from a sample of household figures.
Difficulty: Easy
120. Changes in nominal GDP
A) are due to changes in price only while changes in real GDP are attributed to movements in output and price.
B) are due to changes in output and price while changes in real GDP are attributed to movements in output only.
C) are due to changes in exchange rate while changes in real GDP are attributed to movements in price only.
D) and changes in real GDP are due to changes in output and price.
Difficulty: Easy
121. “Avatar,” a movie released in 1998, was, as of 1999, the top-grossing movie of all time. However, in real terms, it ranked eighth in box office receipts, below an older hit movie, “Gone With the Wind.” From this information, we can conclude that
A) more people went to see “Gone with the Wind” than “Avatar”.
B) fewer people went to see “Gone with the Wind” than “Avatar”.
C) over times, individuals movie watching habits have changed .
D) production cost of “Gone with the Wind” was much lesser than that of “Avatar”..
Difficulty: Medium
122. An increase in real GDP from 2002 to 2006 necessarily indicates that
A) people are better off in 2002 than they were in 2006.
B) depreciation was lower in 2002 than it is in 2006.
C) prices increased between 2002 and 2006.
D) quantities of goods and services produced increased between 2002 and 2006.
Difficulty: Easy
123. It is difficult to measure the contribution of the service sector to GDP because
A) its contribution to GDP is very little.
B) of large fluctuations in prices in the service sector.
C) there are close ties between the service sector and illegal activities.
D) it is difficult to determine what counts as a unit of output.
Difficulty: Easy
124. Which of the following is a shortcoming of GDP accounts?
A) They tend to overstate the trade balance as only exports are considered.
B) They do not take into account the unemployment level.
C) They include only production by the private sector and not government production.
D) They ignore the impact of pollution on the environment.
Difficulty: Medium
125. Which of the following would not be included in the measurement of GDP?
A) federal government payments for Jeeps
B) a purchase of California wine by a Canadian firm
C) employers’ payments for employees’ medical insurance
D) transactions in the underground economy
Difficulty: Easy
126. As households eat out more, purchase more prepared foods at the grocery store, hire out child care services that they once performed themselves, what is likely to happen to the value of GDP?
A) The value of GDP is likely to decrease.
B) The value of GDP is likely to increase.
C) GDP will not be affected because there is no net increase in the output of goods and services.
D) GDP will not be affected because there is no net increase in the output of goods and services but GDI will increase.
Difficulty: Medium
127. An increase in real GDP
A) reduces the amount of pollution.
B) corresponds to an increase in leisure.
C) may or may not correspond to an increase in human happiness.
D) means that all people in the country are better off.
Difficulty: Easy
128. In the generation of GDP, pollution often occurs. So, we can infer that
A) the value of nominal GDP will always be greater than the value of real GDP.
B) the value of real GDP will always be greater than the value of nominal GDP.
C) GDP is not always a good measure of economic or social welfare.
D) the value of GDP is underestimated.
Difficulty: Easy
129. Which of the following is the best measure of a nation’s standard of living?
A) nominal GDP
B) market GDP
C) real GDP per capita
D) nominal GDP per capita
Difficulty: Easy
130. Real GDP per capita measures
A) GDP less depreciation.
B) the average income of households.
C) the annual wages of laborers minus income tax.
D) average output per person.
Difficulty: Easy
131. Which of the following is the best measure for comparing the standard of living across countries?
A) productivity
B) gross national product
C) real gross national product
D) real gross national product per person
Difficulty: Easy
True/False
1. GDP is the total market value of all final goods and services produced within an economy during a year.
2. Nominal GDP uses current market prices and real GDP measures GDP using base-year prices.
3. Expenditure on new equipment replacing older machines in a factory is an example of capital stock.
4. Unemployment benefits provided by the U.S. government make up a major portion of the U.S. government purchases.
5. GDP may be calculated by totaling either the market values of all final goods and services or the income earned during production of those final goods and services.
6. Gross national product minus net factor earnings from abroad is equal to gross domestic product.
7. Government purchases include transfer payments.
8. Daniel, an U.S. resident, purchases a Mercedes car from a dealer based in German and ships it to the U.S. This activity negatively affects the U.S. GDP.
9. A Japanese worker, working in the U.S., deposits some money in his bank account, and his son collects the money from a branch of the same bank in Japan. This activity reduces the U.S. GDP.
10. Double counting occurs when both intermediate and final goods are included in the GDP.
11. If flour is sold to a bread producing firm, then the value of that flour is not included in the GDP.
12. Economic data adjusted for price level changes are said to be expressed in terms of current dollars.
13. Per capita real GDP indicates the way in which GDP is distributed among people.
14. The value of a final good or a service can be calculated by adding up all the values of intermediate goods or services at each stage of the production process.
15. A Canadian resident runs a corner store in New York, U.S. His monthly income from the store is included in the Canadian GNP.
16. GNP equals GDP less depreciation.
17. Goods and services produced and but not sold in the current period are not included in current period GDP.
18. GDP increases if you purchase General Motors stock.
19. Government expenditure is the largest single category of GDP.
20. GDP can be found by adding the final value of all goods and services produced or by totaling all factor incomes (including indirect business taxes and depreciation) for the period.
21. Employee compensation is the largest among the components of factor income.
22. For a homeowner, the rental value of the home is estimated and included in GDP.
23. The costs of wages are included in the value added approach to calculating income, but profits are not included.
24. Disposable personal income excludes transfer payments received by households.
25. If a farmer grows crops and keeps that for domestic consumption, then the value of the produced is included in the GDP of the economy.
Short Answer
1. What is the difference between real GDP and nominal GDP?
2. What is the difference between a final good and an intermediate good? Give one example of each. How are they treated in GDP calculations?
3. Give three reasons why real GDP is not an adequate measure of a nation’s well being. Despite these limitations, do you think real GDP is a useful statistic? Explain your answer.
4. Explain why transfer payments are not included in GDP.
5. In each of the following cases, indicate if GDP is affected, under what category and what happens to GDP.
a. You buy a used textbook from one of your classmates.
b. You buy a new umbrella.
c. Ella, a French tourist, has a haircut in a salon in San Francisco.
d. New Orleans cleans up after a devastating hurricane.
e. Avon Barksdale buys a shipment of cocaine from Colombia.
f. You pay a monthly rent to Mrs. Wong, your landlady.
g. Kiyah spends two hours baby-sitting her little brother.
h. You hire Bruce Tree Service to mow your lawn every week.
i. Jodi purchases her first home, a 1980s fixer-upper.
j. The president of Ohio State University is given a salary increase.