Deck 20: Measuring a Nations Well-Being

Question 1

Wages are an example of a transfer payment because there is a transfer of payment from the firm to the worker.

Answer 1

False

Question 2

Suppose that an economy produces 40,000 units of good A which sells at €4 a unit and 20,000 units of good B which sells at €5 per unit. Production of good A contributes

A) 2 times as much to GDP as the production of good B.
B) 8/5 times as much to GDP as the production of good B.
C) 5/4 times as much to GDP as the production of good B.
D) 4/5 times as much to GDP as the production of good B.

Answer 2

B

Question 3

Gross domestic product measures

A) Income and expenditures.
B) Income but not expenditures.
C) Expenditures but not income.
D) Neither income nor expenditures.

Answer 3

A

Question 4

The circular flow model is not used anymore because it fails to perfectly replicate real world situations

Question 5

Nominal GDP employs current prices to value output while real GDP employs constant base-year prices to value output.

Question 6

Macroeconomists study

A) The decisions of individual households and firms.
B) The interaction between households and firms.
C) Economy-wide phenomena.
D) Regulations imposed on firms and unions.

Question 7

The production of an apple contributes more to GDP than the production of a gold ring because food is necessary for life itself.

Question 8

GDP does not make adjustments for leisure time, environmental quality, or volunteer work.

Question 9

If a timber yard sells €1,000 of timber to a carpenter and the carpenter uses the timber to build a garage which he sells for €5,000, the contribution to GDP is €6,000.

Question 10

A country with a larger GDP per person generally has a greater standard of living or quality of life than a country with a smaller GDP per person.

Question 11

An example of a transfer payment is

A) profit.
B) rent.
C) unemployment benefits.
D) government purchases.
E) wages.

Question 12

If nominal GDP in 2015 exceeds nominal GDP in 2014, real output must have risen.

Question 13

For an economy as a whole, income equals expenditure because the income of the seller must be equal to the expenditure of the buyer.

Question 14

Cigarettes should be valued in GDP at €7.50 per pack even though €5.00 of that price is tax because the buyers paid €7.50 per pack.

Question 15

For an economy as a whole,

A) wages must equal profit.
B) consumption must equal saving.
C) income must equal expenditure.
D) the number of buyers must equal the number of sellers.

Question 16

In the circular-flow diagram, payments for labour, land, and capital flow from firms to households through the markets for the factors of production.

Question 17

Which of the following statements about GDP is correct?

A) GDP measures two things at once: the total income of everyone in the economy and the total expenditure on the economy's output of goods and services.
B) Money continuously flows from households to firms and then back to households, and GDP measures this flow of money.
C) GDP is generally regarded as the best single measure of a society's economic well-being.
D) All of the above are correct.

Question 18

Expenditures on a nation's domestic production

A) Is less than its domestic production.
B) are equal to its domestic production.
C) are greater than its domestic production.
D) could be less than, equal to, or greater than its domestic production.

Question 19

Changes in the GDP deflator reflect only changes in the prices of goods and services.

Question 20

Because every transaction has a buyer and a seller,

A) GDP is more closely associated with an economy's income than it is with an economy's expenditure.
B) every transaction contributes equally to an economy's income and to its expenditure.
C) the number of firms must be equal to the number of households in a simple circular-flow diagram.
D) firms' profits are necessarily zero in a simple circular-flow diagram.

Question 21

Which of the following would be excluded from UK GDP for 2014? The sale of

A) a haircut.
B) the value of a lawyer's services.
C) a 2014 Honda made in the UK.
D) a loaf of bread
E) a home built in 2013 and first sold in 2014.

Question 22

Gross Domestic Product is the sum of the market value of

A) intermediate goods.
B) final goods and services.
C) manufactured goods.
D) inferior goods and services.
E) normal goods and services.

Question 23

Refer to Figure 1. What is the value of real GDP for 2014?

A) €800
B) €1,060
C) €1140
D) €1,200
E) €1,460

Question 24

Which of the following would be counted in France's GDP?

A) The purchase of an historic chateau
B) The purchase of a haircut
C) The purchase of a €1,000 government savings bond
D) The value generated when Pierre washes his car in his garden

Question 25

Real GDP is measured in ________ prices while nominal GDP is measured in ________ prices.

A) Foreign; domestic
B) Current year; base year
C) Domestic; foreign
D) Base year; current year
E) Intermediate; final

Question 26

Assume net exports are €-220, consumption is €5,000, tax revenues are €1,000, government purchases are €1,500, and 2010 GDP, calculated by the expenditures approach, is €8,000. We can conclude that

A) Private investment was €1,940.
B) Public investment was €310.
C) Private investment was €320.
D) Private investment was €1,720.

Question 27

If a cobbler buys leather for €100 and thread for €50 and uses them to produce and sell €500 worth of shoes to consumers, the contribution to GDP is

A) €50.
B) €100.
C) €650.
D) €500.
E) €600.

Question 28

Refer to Figure 1. What is the percentage increase in prices from 2013 to 2014?

A) 0 per cent
B) 13 per cent
C) 16 per cent
D) 22 per cent
E) 38 per cent

Question 29

Gross Domestic Product can be measured as the sum of

A) final goods and services, intermediate goods, transfer payments, and rent.
B) consumption, investment, government purchases, and net exports.
C) consumption, transfer payments, wages, and profits.
D) Net National Product, Gross National Product, and disposable personal income.
E) investment, wages, profits, and intermediate production.

Question 30

GDP would include which of the following?

A) The value of taking a day off from work
B) Consulting services
C) Intermediate sales
D) Illegal drug sales
E) Housework

Question 31

UK Gross Domestic Product (in contrast to Gross National Product) measures the production and income of

A) British-owned firms no matter where they are located in the world.
B) none of these answers.
C) the domestic service sector only.
D) people and factories located within the borders of the UK.
E) the domestic manufacturing sector only.

Question 32

The value of plant and equipment worn out in the process of manufacturing goods and services is measured by

A) intermediate production.
B) Net National Product.
C) investment.
D) depreciation.
E) consumption.

Question 33

Refer to Figure 1. What is the value of the GDP deflator in 2014?

A) 100
B) 113
C) 116
D) 119
E) 138

Question 34

In producing a sweater, a man who shears sheep pays a farmer €4 for a sheep's wool. The shearing shop sells the wool to a knitting mill for €7. The knitting mill buys the wool and makes it into a fine fabric and sells it to a sweater-making firm for €13. The sweater-making firm sells the sweater to a clothing store for €20, and the clothing store sells the sweater, gift wrapped, for €50. What is the contribution to GDP of the production and sale of the sweater?

A) €4
B) €44
C) €50
D) €94

Question 35

Refer to Figure 1. What is the percentage increase in real GDP from 2013 to 2014?

A) 0 per cent
B) 7 per cent
C) 22 per cent
D) 27 per cent
E) 32 per cent

Question 36

If nominal GDP in one year exceeds nominal GDP in the previous year, then the production of output

A) Must have fallen.
B) Must have risen.
C) Must have stayed the same.
D) May have risen, fallen, or stayed the same because there is not enough information to determine what happened to real output.

Question 37

The four categories of expenditures that make up GDP are consumption, investment,

A) Exports, and government purchases.
B) Imports, and government purchases.
C) Net exports, and government purchases.
D) Net exports, and government transfer payments.

Question 38

Marie grows vegetables in her garden to feed her family. The vegetables she grows are not counted in GDP because

A) It was not produced for the marketplace.
B) It is an intermediate good, which Marie will process further.
C) The vegetables have no value.
D) It reduces the amount of vegetables she will buy from shops.

Question 39

If private investment increased by €50 billion while GDP remained the same, which of the following could have occurred, all else being the same?

A) Consumption spending decreased by €50 billion.
B) Exports increased by €50 billion.
C) Imports decreased by €50 billion.
D) Net exports increased by €50 billion.

Question 40

Refer to Figure1. What is the approximate percentage increase in prices from 2014 to 2015?

A) 0 per cent
B) 13 per cent
C) 16 per cent
D) 38 per cent
E) 22 per cent

Question 41

The three sources of income for the household are

A) taxes, subsidies from the government, and rent.
B) wages, rent, and profit.
C) wages, rent, and subsidies from the government.
D) wages, rebates, and rent.

Question 42

GDP may not be a reliable indicator of the standard of living of a country because it does not include:

A) Spending on investment goods
B) The value of goods and services produced outside the market system.
C) Discretionary spending of non-resident workers
D) The estimated value of goods to individuals
E) The private costs of consumption

Question 43

Suppose the government passes a law eliminating holidays resulting in increased, production of goods and services. Based on this scenario, which of the following statements is correct?

A) GDP would definitely increase, despite the fact that GDP includes leisure.
B) GDP would definitely increase because GDP excludes leisure.
C) GDP could either increase or decrease because GDP includes leisure.
D) GDP could either increase or decrease because GDP excludes leisure.

Question 44

Explain why it is the case that the value of intermediate goods produced and sold during the year is not included directly as part of GDP, but the value of intermediate goods produced and not sold is included directly as part of GDP.

Question 45

GDP is not a perfect measure of well-being; for example,

A) GDP excludes the value of volunteer work.
B) GDP does not address the distribution of income.
C) GDP does not address environmental quality.
D) All of the above are correct.

Question 46

Describe the main components of GDP.

Question 47

How is your purchase of a €40,000 BMW automobile that was produced entirely in Germany recorded in the UK GDP accounts?

A) Consumption increases by €40,000 and net exports decreases by €40,000.
B) Net exports increases by €40,000.
C) There is no impact because this transaction does not involve domestic production.
D) Investment increases by €40,000 and net exports increases by €40,000.
E) Net exports decreases by €40,000.

Question 48

Suppose a person marries his or her gardener and therefore no longer pays him or her for gardening services. GDP

A) Stays the same as long as the services are still provided.
B) Increases since the services are now provided for free.
C) Decreases since there is no longer a market exchange.
D) Stays the same, since services are not included in GDP.

Question 49

GDP is used as the basic measure of a society's economic well-being. A better measure of the economic well-being of individuals in society is

A) Saving per person.
B) GDP per person.
C) Government expenditures per person.
D) Investment per business firm.

Question 50

GDP is defined as the market value of all final goods and services produced within a country in a given period of time. In spite of this definition, some production is left out of GDP. Explain why some final goods and services are not included.

Question 51

Real GDP is nominal GDP

A) Plus depreciation.
B) Adjusted for changes in the price level.
C) Minus depreciation.
D) Minus taxes.

Question 52

Since it is counted as investment, why doesn't the purchase of earthmoving equipment from China by a UK corporation increase UK GDP?

Question 53

Identify the immediate effect of each of the following events on UK GDP and its components.
a. James receives a Social Security check.
b. John buys an Italian sports car.
c. Henry buys domestically produced tools for his construction company.

Question 54

UK GDP would exclude which of the following?

A) Lawyer services purchased by a homebuyer.
B) The purchase of a new Nissan produced in the UK.
C) Copper purchased by pipe manufacturer in the UK.
D) The purchased of a new computer produced in the UK.
E) Lawn care services purchased by a UK homeowner.

Question 55

GDP per person tells us the income and expenditure of the

A) Richest person in the economy.
B) Poorest person in the economy.
C) Average person in the economy.
D) Entire economy.

Question 56

Suppose that population grows by 2 per cent. For the standard of living to rise, which of the following must occur?

A) Nominal GDP must grow by more than 2 per cent.
B) Real GDP must grow by more than 2 per cent.
C) Real GDP per capita must grow by more than 2 per cent.
D) Consumption spending must grow by more than 2 per cent.

Question 57

Households play what role(s) in the circular flow diagram?

A) purchasers of factors of production and sellers of services
B) purchasers of factors of production and sellers of goods
C) purchasers of goods and services only
D) purchasers of goods and services and sellers of factors of production

Question 58

Last year country A had a nominal GDP of €600 billion, a GDP deflator of 150 and a population of 40 million. Country B had a nominal GDP of €720 billion, a GDP deflator of 120 and a population of 50 million. From these numbers which country is likely to have had the higher standard of living?

A) Country A because it had the higher nominal GDP per person.
B) Country B because it had the higher nominal GDP per person.
C) Country A because it had the higher real GDP per person.
D) Country B because it had the higher real GDP per person.

Question 59

Assume that between two periods, GDP of a European country measured in current prices fell from €96 billion to €48 billion. Over the same period, the relevant price index fell from 100 to 75.
a. What was the percentage decline in nominal GDP during the period?
b. What was the percentage decline in real GDP during this period? Show your work.

Question 60

If your grandparents buy a newly built retirement home, this transaction would affect

A) Investment.
B) Net exports.
C) Government purchases.
D) Consumption.
E) Disposable income.

Question 61

Using the outline below, draw a circular-flow diagram representing the interactions between households and firms in a simple economy. Explain briefly the various parts of the diagram.

Question 62

In Europe, real GDP is substantially higher today than it was 60 years ago. What does this tell us, and what does it not tell us, about the well-being of Europeans?

Question 63

You find that your salary for the year is higher this year than it was last year. Does that mean that your real income has increased? Explain carefully.

Question 64

Why is GDP per capita a good measure of economic well-being?

Question 65

The table below contains data for country A for the year 2014.
Household purchases of durable goods
€1293
Household purchases of nondurable goods
€1717
Household purchases of services
€301
Household purchases of new housing
€704
Purchases of capital equipment
€310
Inventory changes
€374
Purchases of new structures
€611
Depreciation
€117
Salaries of government workers
€1422
Government expenditures on public works
€553
Transfer payments
€777
Foreign purchases of domestically produced goods
€88
Domestic purchases of foreign goods
€120
In 2014 what was country A's:
a) GDP in 2010
b) Consumption
c) Investment
d) Government purchases
e) Exports
f) Imports
g) Net exports