Chapter 23. Measuring a Nation's Income

1. Gross domestic product

a. is the market value of all final goods and services produced within a country in a given period (usually a year).Correct. The key words and phrases are market value, final, within a country, and a given time period.

b. is the income in the hands of individuals after deducting income taxes; income available to households to spend and save.Incorrect. GDP is gross income before taxes are deducted.

c. is the value of goods and services purchased by all levels of government -federal, state, and local - in a given period.Incorrect. GDP is a value of production not purchases.

d. is the market value of all final goods and services produced by permanent residents of a nation in a given time period.Incorrect. GDP is produced by all residents not just permanent ones.

2. Suppose an economy's expenditures are equal to $7,000 billion. Income in the economy is

a. less than $7,000 billion.Incorrect. In a basic economic model, total income is exactly the same as total expenditures.

b. more than $7,000 billion.Incorrect. In a basic economic model, total income is exactly the same as total expenditures.

c.

exactly $7,000 billion.Correct. In a basic economic model, total income is exactly the same as total expenditures.

d. Somewhere between $7,000 billion and $8,000 billion.

Incorrect. In a basic economic model, total income is exactly the same as total expenditures.

3. Suppose that nominal GDP is $6,000 billion and real GDP is $3,000. What is the GDP price deflator?

a. 125. Incorrect. The formula for price deflator is Nominal GDP/Real GDP x 100.. In this case $6000/$3000 x 100.

b. 150. Incorrect. The formula for price deflator is Nominal GDP/Real GDP x 100.. In this case $6000/$3000 x 100.

c. 200. Correct. The formula for price deflator is Nominal GDP/Real GDP x 100.. In this case $6000/$3000 x 100.

d. 250. Incorrect. The formula for price deflator is Nominal GDP/Real GDP x 100.. In this case $6000/$3000 x 100.

4. The purchase of final goods and services by households is called

a. investment. Incorrect. This is business spending.

b. public sector expenditure. Incorrect. This would be government spending.

c. consumption. Correct. The category of consumption expenditures is the spending by households.

d. net exports. Incorrect. This is spending by the foreign sector.

5. Investment is the purchase of capital equipment, inventories, and

a. structures. Correct. This spending on buildings is a key component of business spending.

b. non-durable goods. Incorrect. This is a part of consumption spending.

c. depreciation. Incorrect. This is a deduction from business spending.

d. import investment. Incorrect. This is a part of net exports.

6. GDP is represented by

a. C + I + G.Incorrect. The formula C + I + G + NX includes the four expenditure components of GDP.

b. NX + G.Incorrect. The formula C + I + G + NX includes the four expenditure components of GDP.

c. I + G + NX.

Incorrect. The formula C + I + G + NX includes the four expenditure components of GDP.

d. C + I + G + NX.Correct. The formula C + I + G + NX includes the four expenditure components of GDP.

7. Which of the following would be considered an investment expenditure?

a. The Smith's buy a home built in 1990.Incorrect. This is an example of consumption spending.

b. The federal government pays the salary of a captain in the Air Force.Incorrect. This is a type of government spending.

c. Jack's Boat Storage buys a new boatlift.Correct. This is an example of spending by a business firm.

d. Chairs-R-Us buys a used lathe to manufacture chairs.Incorrect. This would not be included because the machine is used.

8. If you were asked to study the quantity of output an economy produced over the past five years, you would use real GDP rather than nominal GDP because

a. exports are excluded from real GDP, making it less complicated than nominal GDP.Incorrect. Exports are not excluded from real GDP.

b. real GDP accounts for imports, making it more precise than nominal GDP.Incorrect. The difference between real and nominal GDP does not involve imports or exports.

c. nominal GDP fails to account for transfer payments, whereas real GDP includes these payments.Incorrect. Neither real nor nominal GDP includes transfer payments.

d. nominal GDP reflects changes in both output and prices, whereas real GDP, roughly speaking, merely reflects changes in output.Correct. Real GDP nets out the effects of price changes and reflects only changes in physical output.

9. Which of the following would NOT be included in GDP?

a. Margaret grows tomatoes in her home garden.Correct. This is a non-market activity that is not counted in GDP.

b. Brooke purchases a new suit to wear to work.Incorrect. This would be included in GDP as consumption spending.

c. Brea purchases a new Ford Taurus.Incorrect. This would be included in GDP as consumption spending.

d. Community Bank purchases new computers for its loan officers.Incorrect. This would be included in GDP as investment spending.

10. Intermediate goods and services

a. are counted in gross domestic product (GDP).Incorrect. They are not counted in order to avoid double counting.

b. are counted in national income but not in gross domestic product (GDP).Incorrect. They are not counted in either national income or GDP.

c. are not counted in gross domestic product (GDP) because that would constitute double counting.Correct. Including intermediate goods would count their value at least twice since their cost is included in final goods also.

d. are not counted in gross domestic product (GDP) because they have no value to consumers.Incorrect. They have value and are included in the price of final products.

11. The two principal components of the private sector circular flow diagram illustrated in the figure are

a. government and foreign trade.Incorrect. The principal components in the circular flow model are the household sector and the business sector.

b. firms and foreign trade.Incorrect. The principal components in the circular flow model are the household sector and the business sector.

c. households and firms.Correct. These are the two sectors that interact in the product and factor markets.

d. households and government.Incorrect. The principal components in the circular flow model are the household sector and the business sector.

12. For the economy as a whole

a. the final goods and services produced in the economy are equal to the total amount of income paid to the factors of production.Correct. Total production value is equal to the total of household income received by all owners of factors of production.

b. final goods and services are equal to total income, minus personal taxes.Incorrect. Final goods are equal to total income before deductions.

c. income paid to the factors of production is equal to the value of total production minus depreciation.Incorrect. Final goods are equal to total income before deductions.

d. the final goods and services produced every year are the same.

Incorrect. The value of final goods changes every year as the economy changes.

13. According to the circular flow model

a. firms own the inputs of production.Incorrect. Households own the factors of production.

b. households produce goods and services.Incorrect. Business firms produce goods and services.

c. goods and services are exchanged in the market for inputs of production.Incorrect. Goods and services are exchanged for money payments.

d. firms pay wages to households.Correct. Wages are the payments by firms to households who provide labor resources.

Spending Billions of Dollars

Spending on new structures $100

Spending on used cars $5

Spending on Social Security $60

Spending on robots used on an assembly line

$40

Sales of exports $10

Sales of imports $7

14. Given the information in the chart, GDP for the economy would be

a. $222 billion.Incorrect. Spending on newly produced goods and services equal $100 billion + $40 billion + $3 billion (net exports) = $143 billion.

b. $217 billion.Incorrect. Spending on newly produced goods and services equal $100 billion + $40 billion + $3 billion (net exports) = $143 billion.

c. $148 billion.Incorrect. Spending on newly produced goods and services equal $100 billion + $40 billion + $3 billion (net exports) = $143 billion.

d. $143 billion.Correct. Spending on newly produced goods and services equal $100 billion + $40 billion + $3 billion (net exports) = $143 billion.

15. Suppose nominal GDP is 7700, and the GDP deflator is 110. Real GDP is

a. $7700.Incorrect. The formula for real GDP is nominal GDP/GDP deflator x 100. In this case 7700/110 x 100 = 7000.

b.

$7000.Correct. The formula for real GDP is nominal GDP/GDP deflator x 100. In this case 7700/110 x 100 = 7000.

c. $847,000.Incorrect. The formula for real GDP is nominal GDP/GDP deflator x 100. In this case 7700/110 x 100 = 7000.

d. $8470.

Incorrect. The formula for real GDP is nominal GDP/GDP deflator x 100. In this case 7700/110 x 100 = 7000.

  Price of Macaroni and

Cheese

Quantity of Macaroni and

Cheese

Price of Soda Quantity of Soda

2000 $0.50 1,000 $1.00 2,000

2001 $0.75 1,500 $1.25 2,200

16. Given the information in the table, in 2000, nominal GDP is

a. $2,500.Correct. The correct answer is $500 of macaroni + $2000 of soda = $2500.

b. $3,875.Incorrect. The correct answer is $500 of macaroni + $2000 of soda = $2500.

c. $3,250.Incorrect. The correct answer is $500 of macaroni + $2000 of soda = $2500.

d. $2,950.

Incorrect. The correct answer is $500 of macaroni + $2000 of soda = $2500.

.

17. In the circular flow diagram

a. households provide firms with factors of production.Correct. Households are on the supply side of the factor market.

b. households provide firms with goods and services.Incorrect. Firms provide households with goods and services.

c. income for factors of production flows from households to firms.Incorrect. Income flows from firms to households.

d. income from the sale of goods and services flows from firms to households.Incorrect. Income from sales flows from households to firms.

18. The single best indicator of economic well being is

a. GDP.Correct. GDP is the most comprehensive measure of income and production.

b. national income.Incorrect. GDP is the most comprehensive measure of income and production.

c.

personal income.

Incorrect. GDP is the most comprehensive measure of income and production.

d. state income.Incorrect. GDP is the most comprehensive measure of income and production.

19. Which of the following would increase GDP?

a. A burglar steals your stereo from your dorm room.Incorrect. GDP does not include illegal activity.

b. You win $100 playing blackjack with your buddies in the dorm.Incorrect. This is a transfer payment not production.

c. You increase your production of pizza at your place of employment, Sam's Pizza and Playhouse.Correct. This is new market production of a product for sale.

d. You sell your stereo and buy 20 shares of Coca-Cola stock with the proceeds of the sale.Incorrect. This is a sale of a used product and the proceeds are saved.

20. Which of the following is NOT included in GDP?

a. a haircut purchased by the Jones familyIncorrect. This is a newly produced service and would be included in GDP.

b. a real estate agent's commissionsIncorrect. This is a newly produced service and would be included in GDP.

c. a used car purchased by a traveling salesman for his jobCorrect. Only newly produced goods and services are included in GDP.

d. a jet fighter manufactured in the U.S. and purchased by the government of EgyptIncorrect. This is a component of net exports.

21. GDP is defined as

a. the market value of all intermediate goods and services produced within a country in a given time period.Incorrect. GDP does not include intermediate goods and services.

b. the market value of all final goods and services produced within a country in a given time period.

Correct. The key words in this definition are market value, final, within a country, and given time period. c. the market value of all intermediate goods and services produced by a country's citizens within a given time period.Incorrect. GDP does not include intermediate goods and services.

d. the market value of all final goods and services produced by a country's citizens within a given time period.Incorrect. GDP includes production of all residents not just citizens.

22. Which of the following is considered a capital expenditure?

a. purchase of 1000 shares of IBM stock

Incorrect. This is not investment but, rather, a form of saving.

b. purchase of a used homeIncorrect. Used goods and services are not included in GDP.

c. purchase of a $1000 bond issued by MicrosoftIncorrect. This is not investment but, rather, a form of saving.

d. purchase of a calculator by a bankerCorrect. This is the purchase of a capital good by a business firm.

23. You pay a doctor $200 to treat an arm that you broke in an accident. How would this influence GDP?

a. GDP would increase.Correct. This service would be included in GDP at the monetary value of $200.

b. GDP would decrease.Incorrect. This service would be included in GDP at the monetary value of $200.

c. GDP would not be affected because a tangible good was not produced.Incorrect. This service would be included in GDP at the monetary value of $200.

d. GDP would increase, but by less than $200 because a tangible good was not produced.

Incorrect. This service would be included in GDP at the monetary value of $200.

.

24. Government purchases

a. are included in GDP.Correct. All government purchases of goods and services are included in GDP.

b. are not included in GDP.Incorrect. All government purchases of goods and services are included in GDP.

c. are included in GDP only if the purchases are made by the federal government.Incorrect. All government purchases of goods and services are included in GDP.

d. are included in GDP only if the purchases are made by state and local governments.

Incorrect. All government purchases of goods and services are included in GDP.

25. The sale of illegal drugs

a. is included in GDP under services.Incorrect. No illegal transactions are included in any component of GDP.

b. is included in GDP under investment.

Incorrect. No illegal transactions are included in any component of GDP.

c. is included in GDP as a component of home production (non market activity).Incorrect. No illegal transactions are included in any component of GDP.

d. is not included in GDP.

Correct. No illegal transactions are included in any component of GDP.

26. Suppose that nominal GDP is $6,000 billion and the GDP price deflator is 250. What is real GDP?

a. $15,000Incorrect. The formula for calculating real GDP is Nominal GDP/GDP price deflator x 100. In this case: $6000 billion/250 x 100 = $2400 billion.

b. $1,500

Incorrect. The formula for calculating real GDP is Nominal GDP/GDP price deflator x 100. In this case: $6000 billion/250 x 100 = $2400 billion.

c. $2,400. Correct. The formula for calculating real GDP is Nominal GDP/GDP price deflator x 100. In this case: $6000 billion/250 x 100 = $2400 billion.

d. $24,000

Incorrect. The formula for calculating real GDP is Nominal GDP/GDP price deflator x 100. In this case: $6000 billion/250 x 100 = $2400 billion.

27. Which of the following would NOT be counted as part of this year's GDP?

a. the paint you purchase when painting your houseIncorrect. This would be included as consumption spending.

b. the government bond you receive as a birthday presentCorrect. This does not represent the production of a new good or service.

c. the purchase of a new IBM computer by the U.S. government

Incorrect. This would be a government expenditure.

d. the purchase of wheat (produced during the year by a Kansas farmer) by the Russian governmentIncorrect. This would be part of net exports.

28. The largest component of GDP is

a. net exports. Incorrect. The largest component of GDP is consumption at about 69%.

b. consumption.Correct. The largest component of GDP is consumption at about 69%.

c. government purchases.Incorrect. The largest component of GDP is consumption at about 69%.

d. investment.

Incorrect. The largest component of GDP is consumption at about 69%.

29. Which of the following would be counted in the calculation of GDP?

a. the sale of a rare coin to a coin collectorIncorrect. The sales of used goods are not included in GDP.

b. homes that are rebuilt after being completely destroyed by a hurricane

Correct. This represents newly produced goods and services. c. the sale of 1966 Ford FairmontIncorrect. The sales of used goods are not included in GDP.

d. the sale of cocaine in the black market

Incorrect. Illegal activities are not included in GDP.

30. Net exports

a. is calculated as exports minus imports.Correct. Net exports are the difference between total exports minus total imports.

b. is calculated as imports minus exports.Incorrect. Net exports are the difference between total exports minus total imports.

c. is calculated as imports plus exports.Incorrect. Net exports are the difference between total exports minus total imports.

d. is calculated as exports less government purchases.

Incorrect. Net exports are the difference between total exports minus total imports.

31. If we want to know the amount of expenditures for an average individual in a country, we should look at

a. real GDP.Incorrect. This is nominal GDP adjusted for inflation.

b. nominal GDP.

Incorrect. This is unadjusted total GDP.

c. GDP per person.Correct. GDP per person is total GDP divided by the country's population.

d. current GDP.

Incorrect. This is the equivalent of nominal GDP unadjusted for population.

32. Which of the following is an example of an intermediate good?

a. Ford buys windshields to put in the new Taurus it is manufacturing.Correct. The price of this good will be included in the price of the Taurus.

b. Beth buys a calculator to help her keep track of the balance in her checkbook.Incorrect. This is a final good component of consumption spending.

c. The city of Warrensburg pays $30,000 to hire an additional police officer.Incorrect. This is government spending on services.

d. Karen buys a home constructed in 1956.Incorrect. This is a used good not an intermediate good.

33. Suppose the gross domestic product of the kingdom of Shangri-la is $450 million and the population consists of 150,000 people. What is the GDP per person for the kingdom?

a. $30 millionIncorrect. The answer is found by dividing total GDP by the population. In this case $450,000,000/150,000 = $3000.

b. $3 millionIncorrect. The answer is found by dividing total GDP by the population. In this case $450,000,000/150,000 = $3000.

c. $300,000Incorrect. The answer is found by dividing total GDP by the population. In this case $450,000,000/150,000 = $3000.

d.$3000. Correct. The answer is found by dividing total GDP by the population. In this case $450,000,000/150,000 = $3000.

34. In the simple circular flow diagram

a. wages, rent, and profit flow from firms to households.Correct. These are the payments for factors of production that firms make to households.

b. payments for goods and services flow from firms to households.Incorrect. Payments for goods and services flow from households to firms.

c. goods and services flow from households to firms.Incorrect. Goods and services flow from firms to households.

d. firms produce factors of production.Incorrect. Firms buy factors of production from households.

35. In the circular flow diagram:

a. payments for goods and services flow from business firms to households.Incorrect. Payments for goods and services flow from households to firms.

b. payments for goods and services flow from households to business firms.Correct. Households buy goods and services from firms.

c. final goods and services flow from households to business firms.Incorrect. Goods and services flow from firms to households.

d. factors of production flow from business firms to households.Incorrect. Factors flow from households to firms.

36. Which of the following would NOT be counted as a final good for inclusion in GDP?

a. a piece of glass bought by a consumer to fix a broken windowIncorrect. This would be included as a final product in consumption spending.

b. a sheet of glass purchased by a commercial builder of a new homeCorrect. This is an intermediate good whose cost is included in the price of the home.

c. a sheet of glass produced this year and ending up in the inventory of a retail hardware storeIncorrect. This would end up as part of inventory investment.

d. a home that is built this year, but not soldIncorrect. This would end up as part of inventory investment.

37. Suppose that in the country of Newbia, nominal GDP increased over the 2000-2001 time period. There was no change in real GDP over this time period. We can conclude that

a. there was no change in the price level.Incorrect. The price level would have to rise to increase nominal GDP with no increase in physical output.

b. the price level fell.

Incorrect. The price level would have to rise to increase nominal GDP with no increase in physical output.

c. the price level increased.

Correct. This is the way that nominal GDP rises with no increase in physical output. d. output increased.

Incorrect. The price level would have to rise to increase nominal GDP with no increase in physical output.

38. Spending on capital equipment, inventories, and structures is referred to as

a. consumption expenditure.Incorrect. The economists term for spending by business firms is capital expenditure or capital spending.

b. capital expenditure.Correct. The economists term for spending by business firms is capital expenditure or capital spending.

c. government expenditure.Incorrect. The economists term for spending by business firms is capital expenditure or capital spending.

d. expenditure on net exports.

Incorrect. The economists term for spending by business firms is capital expenditure or capital spending.

39. If real GDP in a given year was $1,000 billion and nominal GDP was $2,500 billion the GDP deflator (index) would be

a. 40.Incorrect. The formula for the GDP deflator is nominal GDP/real GDP x 100. In this case, $2500 billion/$1000 billion x 100 = 250.

b. 100.Incorrect. The formula for the GDP deflator is nominal GDP/real GDP x 100. In this case, $2500 billion/$1000 billion x 100 = 250.

c. 0.4.

Incorrect. The formula for the GDP deflator is nominal GDP/real GDP x 100. In this case, $2500 billion/$1000 billion x 100 = 250.

d. 250. Correct. The formula for the GDP deflator is nominal GDP/real GDP x 100. In this case, $2500 billion/$1000 billion x 100 = 250.

40. Which of the following is correct?

a. GDP includes goods produced both in the U.S. and abroad.Incorrect. GDP does not include production abroad.

b. GNP includes only goods produced in the U.S.

Incorrect. GNP includes production by U.S. citizens abroad.

c. GDP includes intermediate goods, GNP does not.Incorrect. GDP does not include intermediate goods.

d. GNP is the market value of all final goods and services produced by a nation's residents within some given time period.Correct. The terms that make this correct are market value, final, and within a given time period.