Deck 24: Measuring a Nations Income

Question 1

Macroeconomics is the study of economy-wide phenomena including inflation, unemployment and economic growth.

Answer 1

True

Question 2

Consumption is spending by households on goods and services, including household purchases of new housing.

Answer 2

False

Question 3

If Canada's GDP is $1000 billion and Poland's GDP is $100 billion, the average Canadian citizen must be ten times as well-off as the average Polish citizen.

Answer 3

False

Question 4

Over time, the three measures of GDP tend to arrive at the same result.

Question 5

The GDP deflator is not used to identify the increase in the cost of living for typical Australian households.

Question 6

Sandra decides to hire her neighbour's son to water her lawn and feed her dog this year instead of doing those tasks herself as she did last year. Since the same work is done in either case, GDP is unaffected by the change.

Question 7

The value-added approach to measuring GDP is where the value of each stage of the production process is calculated.

Question 8

For the year 2005, nominal GDP is $10 billion and real GDP is $11 billion, so the GDP deflator is 110.

Question 9

A company produces an intermediate good on the last day of the year. If it is sold, GDP will not increase, but if it is not sold, GDP will increase.

Question 10

Real GDP is the production of goods and services valued at a price compared to a certain year.

Question 11

Qantas providing a code-sharing service for passengers booked on British Airways is an example of an increase in net exports.

Question 12

GDP measures an economy's total expenditure on second hand goods and services produced within a country in a given period of time.

Question 13

International studies show that higher GDP per person is associated with higher levels of literacy and greater life expectancy.

Question 14

According to the income-expenditure identity, the total income of a country equals the sum of the four types of expenditure: consumption, investment, government purchases and net exports.

Question 15

Cyclical adjustments are used by statisticians to ensure that the higher production in certain times of the year is kept in perspective.

Question 16

Total transfer payments are included in GDP because the recipients of these payments are providing an exchangeable good or service.

Question 17

Sales made on eBay are all regarded as inputs to the GDP for the country.

Question 18

Macroeconomics is:

A) the study of economics at the level of the industry
B) the study of the economy as a whole
C) the study of individual households and firms and their interactions in markets
D) the study of money and financial markets

Question 19

If a household buys a new car, the purchase is included as consumption in GDP, but if a pizza delivery shop buys a new car to make deliveries, the purchase is an investment.

Question 20

The government reports that GDP increased at an annual rate of four per cent for the third quarter of 1999. This means that GDP was 4 per cent higher at the end of the third quarter than at the beginning of the quarter.

Question 21

The goal of macroeconomics is:

A) to explain the workings of the stock market
B) to explain the changes in the overall economy that affect many households, firms and markets
C) to explain decision-making within the business environment
D) to eliminate the fluctuations in the business cycle

Question 22

GDP includes the value of final goods, and not intermediate goods, because:

A) the value of intermediate goods is already included in the value of final goods
B) the value of intermediate goods is too difficult to measure
C) the value of intermediate goods is measured by GNP
D) the value of intermediate goods depends on the number of separate production processes

Question 23

David's Microchip Company (DMC) produces microchips for MP3 players, which it sells for $18 million to John Smith Electronics (JSE). JSE's MP3 players are sold for a total of $22 million. What is the value added to JSE?

A) $6 million
B) $10 million
C) $4 million
D) $26 million

Question 24

The difference between the values of final production and value of the inputs is called:

A) the surplus of the final goods and services
B) the profit of the final goods and services
C) the value added of the final goods and services
D) the gross product of the final goods and services

Question 25

GDP is used as the basic measure of a society's economic wellbeing. A better measure of the economic wellbeing of individuals in society is:

A) GDP per person
B) the consumption component of GDP
C) government expenditures per person
D) the level of business investment

Question 26

A farmer sells wheat to a miller for $100. The miller makes the wheat into flour and sells it to a baker for $200. The baker makes the wheat into bread and sells it to a grocer for $300. The grocer sells the bread to the public for $400. The effect on GDP is:

A) an increase of $1000
B) an increase of $100
C) an increase of $600
D) an increase of $400

Question 27

If the GDP deflator is $98 billion and the nominal GDP is $1960 billion, then the real GDP is:

A) $2000 billion
B) $20 billion
C) $5 billion
D) $192 080 billion

Question 28

The value of the housing service provided to individuals who live in housing they own themselves is included in GDP by:

A) estimating the rental value of the housing
B) using the monthly mortgage payment
C) using the purchase price of the house
D) none of the above. Because the value cannot be measured directly, it is excluded

Question 29

Consider a country with a consumption of $485 billion, an investment of $175 billion, government purchases of $176 billion, government transfer payments of $24 billion, exports of $19 billion and imports of $40 billion for the year 2010. The country's GDP for 2010 is:

A) $791 billion
B) $839 billion
C) $857 billion
D) $815 billion

Question 30

The country's real GDP for 2011, using 2010 as the base year, is:

A) $1320
B) $1000
C) $1450
D) $1800

Question 31

If the GDP deflator is 200 and real GDP is $40 billion, then nominal GDP is:

A) $8000 billion
B) $20 billion
C) $80 billion
D) $2000 billion

Question 32

Suppose GDP consists of wheat and rice. In 2011, 200 kg of wheat are sold at $4 per kg, and 100 kg of rice are sold at $2 per kg. If in 2012, the base year, the price of wheat was $1 per kg and the price of rice was $2 per kg, then for year 2011:

A) nominal GDP is $1000, real GDP is $250
B) nominal GDP is $400, real GDP is $1000
C) nominal GDP is $400, real GDP is $250
D) nominal GDP is $1000, real GDP is $400

Question 33

The four components of GDP are:
The four components of GDP are:

A) consumption, money supply, government purchases and exports
B) consumption, investment, transfer payments and imports
C) consumption, investment, government purchases and foreign exchange
D) consumption, investment, government purchases and net exports

Question 34

The country's nominal GDP for 2010 is:

A) too difficult to measure
B) $880
C) $1450
D) $1800

Question 35

Many things that society values, such as good health, high-quality education, enjoyable recreation opportunities and desirable moral attributes of the population, are not measured as part of GDP.

A) Therefore GDP is not a useful measure of society's welfare
B) However, GDP is still a useful measure of society's welfare because these other attributes are the responsibility of government
C) However, GDP is still a useful measure of society's welfare because it measures a nation's ability to purchase the inputs that can be used to help produce these contributors to welfare
D) Therefore GDP is not a useful measure of society's welfare unless is it measured per person

Question 36

Statistics such as GDP, the unemployment rate, the rate of inflation and the trade balance are:

A) both microeconomic and macroeconomic
B) neither macroeconomic nor microeconomic, but properly in the realm of political science
C) microeconomic, since they affect individual households and firms
D) macroeconomic, since they tell us something about the entire economy

Question 37

If nominal GDP is $5 trillion and real GDP is $4 trillion, the GDP deflator is:

A) 0.8
B) 1.25
C) 80
D) 125

Question 38

Suppose an economy produces two products: meat pies and hamburgers. In 2011, 20 meat pies are sold at $5 each, and eight hamburgers are sold at $50 each. In 2010, the base year, the price of meat pies was $10 each, and the price of kebabs was $75 each. Therefore:

A) the real 2005 GDP is $800, and the GDP deflator is 62.5
B) the real 2005 GDP is $800, and the GDP deflator is 160
C) the real 2005 GDP is $500, and the GDP deflator is 62.5
D) the real 2005 GDP is $500, and the GDP deflator is 160

Question 39

Gross domestic product measures:

A) the total income of everyone in the economy
B) the total expenditure on the economy's output of goods and services
C) both A and B
D) neither A nor B

Question 40

Real GDP is:

A) the production of goods and services valued at current-year prices
B) the production of goods and services valued at constant prices
C) the production of goods and services valued at future-year prices
D) the production of goods and services valued at the ratio of current-year prices to constant prices

Question 41

Since black market and non-market measures are excluded from measures of GDP, the GDP measure tends to:

A) overestimate the total production of an economy
B) underestimate the total production in an economy
C) not make a significant difference in determining the total production of an economy
D) lead one to the conclusion that GDP measures are not very useful to anyone but market economists

Question 42

How can focusing on GDP output as a measure of an economy's development result in poorer quality of life for its citizens?

Question 43

If nominal GDP increased by 11 per cent while real GDP increased by only 5 per cent, then:

A) the price level must have increased by around 6 per cent
B) the price level must have increased by around 16 per cent
C) the price level remained steady but real output fell by around 6 per cent
D) the unemployment rate must have fallen during the year

Question 44

Nominal GDP will decrease:

A) only if the average level of prices decreases
B) only if the quantity of goods and services produced decreases
C) if either the average level of prices or the quantity of goods and services produced decreases
D) only if the unemployment rate decreases

Question 45

Consider a car manufacturer producing three types of cars: a luxury convertible worth $60 000, a family sedan worth $35 000 and a hatchback worth $23 000. Assume that the shares of input costs for all types are the same. Rank the contribution to GDP for each from highest to lowest and explain why.
ANS:
1. Luxury convertible
2. Family sedan
3. Hatchback

Question 46

Define GDP and explain why some products are excluded.

Question 47

If the total GDP in 2011 was $1302 billion, where consumption expenditure equals $713 million, investment = $285 million, government = $308, the net exports would:

A) be 0.4% of the total GDP
B) equal $5 million
C) both a and b
D) have been negative as import spending is greater than export receipts

Question 48

GDP is considered a good measure of economic wellbeing. However, GDP is not a perfect measure of wellbeing. Why? Discuss factors that are not included in GDP but that affect whether people are better off.

Question 49

Out of the following list, choose the item that would be included in the expenditure approach to calculating GDP:

A) An unemployment cheque from the government to R. Smith
B)
The cost of the second hand mountain bike you bought from your flatmate
C)
A $200 cheque from your Uncle Arthur
D)
The purchase of 60 litres of petrol at $142 cents per litre for your car

Question 50

What is the process used to separate the change in GDP due to an increased output of goods and services, from the change due to increased prices? Why do we make this distinction?

Question 51

For each of the following events, ceteris paribus, state the effect on GDP (does it increase/decrease/remain unchanged?) and why.
A. A few small boat builders decide to move from the production of simple boats for leisure use to the production of yachts for the America's Cup.
B. You are short of cash and you need more exercise so you sell your car for $1000.
C. The Australian Tax Office gets tough on illegal unrecorded activity (the underground economy )
D. A major oil spill occurs off the coastline of an area with high unemployment levels. Many of the local unemployed are employed to help with the clean-up.