test your understanding module 1-1

Module 1

Test Your Understanding

Prof. Vandana Singhvi Patel

Please note that the questions below are not indicative of questions in Quiz 1, Quiz 2 or Final Exam. Use these questions to test your understanding of concepts introduced in Module 1 and readings suggested on Moodle.

1. What is GDP? What is included in its measurement? What is excluded? What are its limitations as a measure of economic activity?

2. Distinguish between the following terms:i. GDP & GNPii. NDP & GDPiii. real GDP & nominal GDPiv. GDP at market price & GDP at factor pricev. GDP at current price & GDP at constant price (2004-’05). Provide examples to illustrate your answer

3. Explain how a loaf of bread can be considered both a final good and an intermediate good. What about steel?

4. Is the purchase of a home included in the calculation of GDP? If yes how and under what conditions? If not, why not? How does activity in real estate sector contribute to GDP?

5. Determine if the following items are included in the expenditure method of calculating GDP and under what component - C, I, G, X or M?i. Juhi buys newly issued shares of stock in a publicly traded firm Tristar

Motors.ii. Raaj buys a new pair of jeans at Cottonworldiii. Jai gets a hair cut at the local hair salon.iv. Rita buys an antique chest at an auction house.v. Vibha buys a used car and replaces the tyresvi. Priya grows herbs on her apartment balcony and shares them with her

friendsvii. Mohit travels to France and buys French wine.viii. Javed, a stay-at-home dad, takes care of his 4 year old twins.ix. Madhu sends her 3 year old to pre-school.x. Rashmi volunteers at a homeless shelter.

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xi. Government pays farmers a Rs 10 per unit subsidy on pesticide boughtxii. Flipkart.com buys books from a publisherxiii. Mayur buys a book from a publisherxiv. Madhuri buys a book from flipkart.com xv. Tata Motors builds a car in Jamshedpur and ships it to Indonesia for sale.xvi. Mayank bets Rs. 5000 on an IPL game.xvii. You buy land to build a home.xviii. You buy a new apartment on Bannerghatta roadxix. Arun buys a 12 year old apartment, renovates the kitchen (new appliances,

etc)

Good A Good BYear Qty Price/Unit Qty Price/unit1 2000 0.1 75 12 2400 0.15 60 1.13 2600 0.25 75 1.2

6. Using the data above where possible calculate nominal GDP, Real GDP (use year 1 as base year), growth rates in real GDP and Nominal GDP, inflation rate using GDP deflator.

7. What would happen in a country in which the value of depreciation is larger than the value of gross investment?

8. Why do we calculate GDP in Rupee instead of computing GDP in kg or units produced?

9. When would NX be a negative number and what implication does this have for the computation of GDP?

10. Why do we have to subtract imports in the calculation of GDP? Hint: We could simply not add M into GDP = C+I +G +X. But why do we have to subtract them from the above calculation as in GDP = C + I + G + X – M?

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11. What would be the effect on GDP with legalization of use of marijuana, child labour and gambling?

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test your understanding module 1-1

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