Exercises chapter 07

Macroeconomics, 3e (Hubbard/O'Brien) Chapter 7 GDP: Measuring Total Production and Income 1) In May 2009, the U.S. auto industry experienced a 34 percent decline in sales compared to May 2008. The automobile industry was experiencing the effects of A) deflation. B) the underground economy. C) the business cycle. D) depreciation. 2) During a business cycle expansion, total production ________ and total employment ________. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases 3) Macroeconomics, as opposed to microeconomics, includes the study of what determines the level of A) employment in a specific industry. B) employment in the economy. C) output of a specific firm. D) output of a specific industry.

4) Macroeconomics seeks to understand A) economic growth, business cycles, and inflation. B) industry sales, marketing strategies and corporate growth. C) product demand, product cost, and profit maximization. D) public choices, private choices, and consumer maximization.

5) In calculating gross domestic product, the Bureau of Economic Analysis uses the sum of the market value of final goods and services produced. This means that the BEA A) simply counts the total number of goods produced in the market place and then adds them up. B) values goods at their market prices, multiplies them by the quantity produced, and then adds them up. C) simply counts the total number of goods and services produced in the marketplace and then adds them up. D) values goods and services at their market prices, multiplies them by the quantity produced, and then adds them up.

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6) Suppose, in 2010, you purchased a house built in 2003. Which of the following would be included in the gross domestic product for 2010? A) the value of the house in 2010 B) the value of the house in 2003 C) the value of the house in 2010 minus depreciation D) the value of the services of the real estate agent 7) Gross domestic product is calculated by summing up A) the total quantity of goods and services in the economy. B) the total quantity of goods and services produced in the economy during a period of time. C) the total market value of goods and services in the economy. D) the total market value of final goods and services produced in the economy during a period of time. 8) Which of the following transactions represents the purchase of a final good? A) Starbucks purchases coffee beans. B) Delta buys a new European-made jetliner. C) Apple computer buys computer processors from Intel. D) Your father buys a new John Deere riding lawn mower. Table 7-1 Product Sweatshirts Dental examinations Coffee drinks Coffee beans Quantity 50 40 1,000 2,000 Price $35.00 75.00 4.00 0.50

9) Refer to Table 7-1. Suppose that a simple economy produces only four goods and services: sweatshirts, dental examinations, coffee drinks, and coffee beans. Assume all of the coffee beans are used in the production of the coffee drinks. Using the information in the above table, nominal GDP for this simple economy equals A) 3,090 units. B) $7,250. C) $8,750. D) $9,750. 10) In the circular flow model, the value of total income for an economy ________ the value of total production. A) equals B) is greater than C) is less than

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D) may be greater than or less than

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11) In the circular flow model, the value of total production for an economy ________ the value of total expenditures on final goods and services. A) equals B) is greater than C) is less than D) may be greater than or less than 12) The factors of production include A) wages. B) capital. C) investment. D) transfers. 13) An example of business fixed investment spending is A) a purchase of a home by a household. B) a purchase of a computer by an accounting firm. C) a purchase of a bond by General Electric Corporation. D) $200 million of unsold cars at a car dealership. 14) To calculate GDP by the expenditure method, one must add A) wages, rents, interest, and profits. B) consumption spending, investment spending, government spending and net exports. C) consumption spending, investment spending, government spending and exports. D) labor, natural resources, entrepreneurship, and capital. 15) The purchase of a new house is included in A) consumption expenditures. B) investment expenditures. C) government purchases. D) net exports. 16) The purchase by a foreign government of an airplane produced in the United States is included in U.S. A) consumption expenditures. B) investment expenditures. C) government purchases. D) net exports.

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17) In 2009, Kendall Ford, an automobile dealership, spends $20,000 on a new car lift for its repair shop, $2,000 on a new copy machine for its sales division, and $600,000 on Ford Motor company stock. Unsold cars and trucks were valued at $400,000 on January 1, 2009 and unsold cars and trucks were valued at $900,000 on December 31, 2009. What is Kendall Ford's total investment spending in 2009? A) $22,000 B) $322,000 C) $522,000 D) $1,022,000

Table 7-2 Consumption expenditures Investment expenditures Government purchases Exports Imports Wages $800 200 300 100 200 800

18) Refer to Table 7-2. Consider the data above (in billions of dollars) for an economy: Gross domestic product (in billions of dollars) for this economy equals A) $2,200. B) $1,600. C) $1,400. D) $1,200. Table 7-3 Consumption expenditures Investment expenditures Government purchases Government transfer payments Exports Imports $800 300 300 400 300 100

19) Refer to Table 7-3. Consider the data above (in billions of dollars) for an economy: Gross domestic product (in billions of dollars) for this economy equals A) $2,200. B) $2,100. C) $1,600.

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D) $1,400.

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Table 7-4 Stage of Production Seller 1 Steel mill 2 Auto manufacturer 3 Auto dealer Buyer Auto manufacturer Auto dealer Consumer Price $10,000 18,000 25,000

Consider the table above showing three stages of production of an automobile. 20) Refer to Table 7-4. The value added by the automobile dealer equals A) $7,000. B) $15,000. C) $18,000. D) $25,000. 21) Refer to Table 7-4. The value of each automobile in gross domestic product equals A) $7,000. B) $15,000. C) $18,000. D) $25,000.

Table 7-5 Product Sweaters CDs Sugar Soft drinks Quantity 50 150 600 800 Price $50.00 10.00 1.00 0.75

22) Refer to Table 7-5. Suppose that a simple economy produces only four goods and services: sweaters, CDs, sugar, and soft drinks. Assume one half of the sugar is used in making the soft drinks and the other half of the sugar is purchased by households. Calculate nominal GDP for this simple economy.

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23) Gross domestic product understates the total production of final goods and services because of the omission of A) exports. B) inflation. C) intermediate goods. D) household production.

24) The informal sector can be a significant drag on the economies of developing countries because the firms in the informal sector A) produce goods and services no one wants. B) sell their goods and services to citizens in other countries. C) do not pay taxes to the government. D) employ illegal immigrants from other countries. 25) Increases in real GDP would overstate the increase in the well-being of a country over time if, over that time period, the A) average hours worked per week increased. B) amount of pollution decreased. C) price level increased. D) crime rate decreased. 26) Increases in real GDP would understate the well-being of a country over time if, over that time period, the A) crime rate increased. B) percentage of people addicted to illegal drugs increased. C) amount of pollution decreased. D) average hours worked per week decreased.

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Table 7-6 Guns Produced 80 90 Butter Produced 40 60 Price of Butter $4 10

Year 2002 2009

Price of Guns $5 6

Consider the following data for Tyrovia, a country that produces only two products: guns and butter. 27 Refer to Table 7-6. Real GDP for Tyrovia for 2009 using 2002 as the base year equals A) $1,140. B) $880. C) $690. D) $560.

28) Refer to Table 7-8. Nominal GDP for Tyrovia in 2009 equals A) $1,140. B) $880. C) $690. D) $560. Table 7-7 Nominal GDP $7,400 7,813 8,301 8,760

Year 2006 2007 2008 2009

Real GDP $7,537 7,813 8,165 8,516

29) Refer to Table 7-7. Consider the following data on nominal GDP and real GDP (values are in billions of dollars): The base year used in calculating real GDP is A) 2006. B) 2007. C) 2008. D) 2009.

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30) If the quantity of goods and services produced in the economy decreases, A) it may be possible for real GDP to increase. B) real GDP would certainly increase. C) it may be possible for nominal GDP to increase. D) nominal GDP would certainly increase. 31) Which of the following could cause nominal GDP to decrease, but real GDP to increase? A) The price level rises and the quantity of final goods and services produced rises. B) The price level falls and the quantity of final goods and services produced rises. C) The price level rises and the quantity of final goods and services produced falls. D) The price level falls and the quantity of final goods and services produced falls. 32) To examine how the total production of an economy has changed over time, it would be better to examine A) real GDP. B) nominal GDP. C) GDP at current prices. D) the GDP deflator. 33) If nominal GDP is $5 trillion and real GDP is $4 trillion, the GDP deflator is A) 12.5. B) 80. C) 125. D) 800. 34) Nominal GDP will increase A) only if the price level rises. B) only if the price level falls. C) only if the quantity of final goods and services produced rises. D) if either the price level or the quantity of goods and services produced rises. 35) The GDP deflator in year 2 is 105, using year 1 as the base year. This means that, on average, the cost of goods and services is A) 5% higher in year 2 than in year 1. B) 105% higher in year 2 than in year 1. C) 5% higher in year 1 than in year 2. D) 105% higher in year 1 than in year 2. 36) If the GDP deflator is less than 100, then for that year nominal GDP ________ real GDP. A) equals B) is greater than C) is less than

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D) may be greater than or less than

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Table 7-8 Nominal GDP $13,399 14,078 14,441

Year 2006 2007 2008

Real GDP $12,976 13,254 13,312

37) Refer to Table 7-8. Consider the following data on nominal GDP and real GDP (values are in billions of dollars): The GDP deflator for 2007 equals A) 94.1. B) 105.1. C) 106.2. D) 108.5. 38) The output of Mexican citizens who work in Texas would be included in the A) gross domestic product of Mexico. B) gross national product of Mexico. C) gross national product of the United States. D) net national product of the United States.

39) If an American firm opens a production facility in India, the total value of the production will be included in the A) gross domestic product of the United States. B) national income of the United States. C) gross domestic product of India. D) national income of India. 40) A country in which a significant fraction of domestic production takes place in foreignowned factories and facilities is most likely a country where A) GNP is much larger than GDP. B) GDP is much larger than GNP. C) GDP is equal to GNP. D) GDP is not comparable to GDP.

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Problem 1 Table 1 GDP in the Netherlands 2010 (billion euros) 267.0 167.6 85.8 2.7 21.4 92.1 459.2 415.3 - 5.0 89.5 300.5

Private consumption Public consumption Gross private investment in fixed assets Changes in inventories Gross public investment Transfer payments (by government) Exports of goods and services Imports of goods and services Net primary income from abroad Depreciation Compensation of employees Source: CPB, MEV

Calculate (and show your calculation) for the year 2010: 1. GDP (market prices); 2. NNP (market prices); 3. Total government spending; 4. Give three different types of a primary income; 5. Explain why the GDP is not an appropriate measure for the well-being in a country. Problem 2 Table 2. GDP in the Netherlands 2011 (billion euros), at current prices. Wages and salaries (including employers social contributions) Depreciation Net primary income from the rest of the world Private consumption Government consumption Gross investment (in fixed and current assets) (Net) changes in inventories Rent, interest and profit Export of goods and services Import of goods and services Taxes on production and imports minus subsidies Source: MEV 2012, CPB 307.2 92.1 2.0 273.0 169.8 118.3 3.8 142.0 509.4 465.6 63.6

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Calculate (show your calculations!) for 2011: 1. GDP (market prices). 2. NNI (market prices). 3. The GDP does not include all production of a country. Give two different, specific examples of production that is not included in the GDP of a country . Problem 3 Table 3. GDP in the Netherlands Year 2007 2008 2009 2010 GDP at current prices (billions of euros) 571,773 594,480 571.145 588.414 GDP-deflator (2005 = 100) 103.6 105.5 105.1 106.4

Calculate (and show your calculations!): 1. The rate of inflation for 2008 and 2009. 2. The growth rate of real GDP for 2008 and 2009. 3. Mp3 players and tablet pcs have not been part of the Dutch spending pattern for very long. Both goods have been decreasing in price and increasing in quality. What (two) problems does this pose for calculating the consumer price index? Briefly explain your answers.

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