Measuring A Nation's Income

Chapter 10
Measuring a Nation’s Income

1. Macroeconomists study
a. decisions of households and firms.
b. economy-wide phenomena.
c. the interaction of households and firms.
d. regulations of firms and unions.
ANSWER: b. economy-wide phenomena.
TYPE: M DIFFICULTY: 1 SECTION: 10.0
2. Which of the following headlines would be more closely related to what microeconomists study than what
macroeconomists study?
a. Unemployment rate rises from 5 percent to 5.5 percent.
b. Real GDP grows by 3.1 percent in the third quarter.
c. Retail sales at stores show large gains.
d. The price of oranges rises after an early frost.
ANSWER: d. The price of oranges rises after an early frost.
3. Which of the following questions is more likely to be studied by a microeconomist than a macroeconomist?
a. Why do prices in general rise by more in some countries than others?
b. Why do wages differ across industries?
c. Why do production and income increase in some periods and not in others?
d. Why has average income increased over time?
ANSWER: b. Why do wages differ across industries?
TYPE: TF DIFFICULTY: 1 SECTION: 23.0
4. Macroeconomics includes the study of topics such as

a. national output, the inflation rate, and the trade deficit.
b. the price of Cisco stock, wage differences between genders, and antitrust laws.
c. differences in market structure, and how consumers maximize utility.
d. None of the above are correct.
ANSWER: a. national output, the inflation rate, and the trade deficit.
5. The goal of macroeconomics is

a. to explain how economic changes affect prices of particular goods.
b. to devise policies to deal with market failures such as externalities and monopoly.
c. to explain changes that affect households and firms in general.
ANSWER: c. to explain changes that affect households and firms in general.
6. The basic tools of supply and demand are

a. useful only in the analysis of economic behavior in individual markets.
b. useful in analyzing the overall economy, but not in analyzing individual markets.
c. not particularly useful in either macroeconomic or microeconomic analysis.
d. central to macroeconomic analysis as well as to microeconomic analysis.
ANSWER: d. central to macroeconomic analysis as well as to microeconomic analysis.
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278  Chapter 10/Measuring a Nation’s Income
7. Which of the following statistics is the best single measure of an economy’s well-being?
a. the unemployment rate
b. the inflation rate
c. GDP
d. the trade deficit
ANSWER: c. GDP
8. Which of the following is correct for an economy?

a. Income is greater than production.
b. Production is greater than income.
c. Income always equals production.
d. Income equals production only when saving is zero.
ANSWER: c. Income always equals production.
9. Robert works as a lawyer.

a. GDP computations should be made using his income from providing legal services, not his production of legal
services.
b. GDP computations should be made using his production, not his income from providing legal services.
c. GDP computations should include both his income and his production.
d. GDP computations should include either his income or his production, but not both.
ANSWER: d. GDP computations should include either his income or his production, but not both.
10. If GDP rises,

a. income and production must both rise.
b. income and production must both fall.
c. income must rise, but production may rise or fall.
d. production must rise, but income may rise or fall.
ANSWER: a. income and production must both rise.
11. In a simple circular-flow diagram total income and total expenditure are
a. seldom equal because of the dynamic changes which occur in an economy.
b. equal only when all goods and services produced are sold.
c. always equal because every transaction has a buyer and a seller.
d. always equal because of accounting rules.
ANSWER: c. always equal because every transaction has a buyer and a seller.
12. In a simple circular-flow diagram, total income and total expenditures in an economy are
a. equal because firms are ultimately owned by households.
b. equal only if there is no saving.
c. equal because every transaction has a buyer and a seller.
d. never equal because some people’s income is not for production.
ANSWER: c. equal because every transaction has a buyer and a seller.
13. Firms use the money they get from a sale for
a. paying wages.
b. making a profit.
c. paying rents.
d. All of the above are correct.
ANSWER: d. All of the above are correct.
Chapter 10/Measuring a Nation’s Income  279
14. The simple circular-flow diagram illustrates that

a. production generates income so that income and production are the same.
b. the economy’s income exceeds its production.
c. the production of an economy exceeds its income.
d. None of the above are necessarily correct.
ANSWER: a. production generates income so that income and production are the same.
15. In an economy consisting of only households and firms, GDP can be computed by
a. adding up the total expenditures of households.
b. adding up the total income paid by firms.
c. Either a or b are correct.
ANSWER: c. Either a or b are correct.
16. Production equals income because

a. by law firms must pay out all their revenue as income to someone.
b. for every sale there is a buyer and a seller.
c. because ultimately firms are owned by households.
ANSWER: b. for every sale there is a buyer and a seller.
17. Which of the following is the correct definition of GDP?

a. the market value of all goods produced within a country
b. the market value of all final goods and services produced by the citizens of a country
c. the market value of all final goods and services produced within a country
ANSWER: c. the market value of all final goods and services produced within a country
18. To compute GDP we

a. simply sum the number of final goods and services.
b. sum the cost of producing final goods and services.
c. use weights determined by a survey regarding how much people value different sorts of goods and services to
compute GDP as a weighted average.
d. sum the market values of final goods and services.
ANSWER: d. sum the market values of final goods and services.
19. In order to include many different products in an aggregate measure, GDP is computed using
a. values of goods based on surveys of consumers.
b. primarily market prices.
c. primarily costs of production.
d. weights that are computed by how much of a particular good is produced relative to total output.
ANSWER: b. primarily market prices.
20. GDP is computed using market prices as the value of final goods and services because
a. market prices don’t change much, so it is easy to make comparisons between years.
b. if market prices are out of line with how people value goods, the government sets ceilings and floors on them.
c. market prices reflect the value of goods and services.
d. None of the above are correct; the government does not use market prices to compute GDP.
ANSWER: c. market prices reflect the value of goods and services.
21. Which of the following is not included in GDP?

a. unpaid cleaning and maintenance of houses
b. services such as those provided by lawyers and hair stylists
c. the estimated rental value of owner-occupied housing
d. production of foreign citizens living in the United States
ANSWER: a. unpaid cleaning and maintenance of houses
22. The value of housing service provided by the economy’s stock of houses is
a. not included in GDP since it is not sold on the market.
b. counted and is valued as the mortgage payment made on the house.
c. counted and uses only the purchase price of the house in the year it is sold.
d. counted and is based on an estimate of its rental value.
ANSWER: d. counted and is based on an estimate of its rental value.
23. Suppose that an apartment complex converts to a condominium where the renters are now owners of their former
apartments.
a. The rent was included in GDP; the purchases of the condominiums are not.
b. The rent was included in GDP, and so is the purchase of the condominiums.
c. The rent was not included in GDP; the purchases of the condominiums are.
d. Neither the rent of the apartments nor the purchases of the condominium are included in GDP.
ANSWER: a. the rent was included in GDP; the purchases of the condominiums are not.
24. Suppose that an apartment complex converts to a condominium where the renters are now owners of their former
apartments. Suppose that an estimate of the value of the condominium owners’ housing services is now the same as
their former rent.
a. GDP necessarily increases.
b. GDP necessarily decreases.
c. GDP is unaffected because neither the rent nor the estimate of the value of housing services is included in GDP.
d. GDP is unaffected because previously rent was included in GDP, and now it is replaced by the estimate of the
value of housing services.
ANSWER: d. GDP is unaffected because previously rent was included in GDP, and now it is replaced by the estimate
of the value of housing services.
25. Which of the following non-market goods or services is included as an estimate in U.S. GDP?
a. the value of unpaid housework
b. the value of vegetables that people grow in their gardens
c. the estimated rental value of owner-occupied homes
ANSWER: c. the estimated rental value of owner-occupied homes
26. Over the last few decades Americans have chosen to cook less at home and eat more at restaurants. This change in
behavior, by itself,
a. increased measured GDP.
b. reduced measured GDP.
c. did not affect measured GDP.
d. affected measured GDP only to the extent that people eat more at restaurants than at home.
ANSWER: a. increased measured GDP.
27. Over time people have come to rely more on market-produced goods and less on goods that they produce for
themselves. For example people eat at restaurants relatively more and prepare their own meals at home relatively
less. By itself this change would
a. make GDP fall over time.
b. not make any change in GDP over time.
c. make GDP rise over time.
d. change GDP, but in an uncertain direction.
ANSWER: c. make GDP rise over time.
28. Ralph pays someone to mow his lawn. Norton mows his own lawn.
a. Only what Ralph pays to have his lawn mowed is included in GDP.
b. What Ralph pays to have his lawn mowed and the estimated value to Norton of mowing his own lawn are both
included in GDP.
c. Neither what Ralph pays nor the estimated value of Norton’s mowing is included in GDP.
d. The answer depends on what Norton reports to survey takers.
ANSWER: a. only what Ralph pays to have his lawn mowed is included in GDP.
29. Jim is a chef at a restaurant. Sally prepared her own meals during the first quarter of 2002, and then ate at Jim’s
restaurant every day in the second quarter of 2002. Sally’s change of habit
a. necessarily raises GDP.
b. necessarily reduces GDP.
c. raises GDP only if the restaurant meals are more expensive than the estimated value of Sally’s meals.
d. has no impact on GDP.
ANSWER: a. necessarily raises GDP.
30. If Susan decides to change the oil in her car herself instead of having Speedy Lube change the oil for her GDP
a. necessarily rises.
b. necessarily falls.
c. will be unaffected because the same service is produced in either case.
d. will be unaffected because car maintenance is not included in GDP.
ANSWER: b. necessarily falls.
31. A professional gambler moves from a state where gambling is illegal to a state where gambling is legal. This move
b. necessarily decreases GDP.
c. doesn’t change GDP because gambling is never included in GDP.
d. doesn’t change GDP because in either case his income is included.
ANSWER: a. necessarily raises GDP.
32. A professional gambler moves from a state where gambling is legal to a state where gambling is illegal. This move
b. necessarily decreases GDP.
c. doesn’t change GDP because gambling is never included in GDP.
d. doesn’t change GDP because in either case his income is included.
ANSWER: b. necessarily decreases GDP.
33. If a state made an illegal activity such as gambling or prostitution legal, then other things the same GDP
a. necessarily increases.
b. necessarily decreases.
c. doesn’t change because both legal and illegal production are included in GDP.
d. doesn’t change because these activities are never included in GDP.
ANSWER: a. necessarily increases.
34. If a state legalized gambling and then reversed its decision and made gambling illegal, then other things the same
GDP
a. necessarily increases.
b. necessarily decreases.
c. doesn’t change because both legal and illegal production are included in GDP.
d. doesn’t change because gambling is never included in GDP.
ANSWER: b. necessarily decreases.
35. Roommates Grace and Kelly are sharing household chores and think they have an even exchange. Other things the
same, if instead they paid each other for the chores the other did GDP would
a. rise.
b. fall.
c. be unaffected because paid or not, household chores are not included in GDP.
d. be unaffected because paid or not, household chores are included in GDP.
ANSWER: a. rise.
36. Which of the following is correct?

a. The value of all intermediate goods and final goods are included in GDP.
b. The value of intermediate goods are included in GDP only if they were produced in the previous year.
c. The value of intermediate goods are included in GDP only if they are purchased by firms rather than
households.
d. The value of intermediate goods are not included in GDP.
ANSWER: d. The value of intermediate goods are not included in GDP.
37. GDP
a. includes the value of intermediate goods so we can get a measure of sales.
b. excludes the value of intermediate goods because they are too difficult to measure.
c. excludes the value of intermediate goods because their value is already counted in the value of final goods.
ANSWER: c. excludes the value of intermediate goods because their value is already counted in the value of final
goods.
38. The total sales of all firms in the economy for a year
a. equals GDP for the year.
b. is larger than GDP for the year.
c. is smaller than GDP for the year.
d. equals GNP for the year.
ANSWER: b. is larger than GDP for the year.
39. Grapes are

a. always counted as an intermediate good.
b. counted as an intermediate good only if they are used to produce another good like wine.
c. counted as an intermediate good only if they are consumed.
d. counted as an intermediate good whether they are used to produce another good or consumed.
ANSWER: b. counted as an intermediate good only if they are used to produce another good like wine.
40. Flour is
a. always counted as an intermediate good.
b. counted as an intermediate good if it is used by a company to make bread.
c. counted as a final good if it is used by a consumer who bakes bread for his own consumption.
d. Both b and c are correct.
ANSWER: d. Both b and c are correct.
41. Gasoline is
a. always considered an intermediate good.
b. counted as a final good if a company uses it to provide transportation services.
c. counted as a final good if a consumer uses it to run a lawnmower to mow her yard.
d. Both b and c are correct.
ANSWER: c. counted as a final good if a consumer uses it to run the lawnmower to mow her yard.
42. Goods that go into inventory and are not sold during the current period are
a. counted as intermediate goods and so are not included in current period GDP.
b. counted in current GDP only if the firm that produced them sells them to another firm.
c. included in current period GDP as inventory investment.
d. included in current period GDP as consumption.
ANSWER: c. included in current period GDP as inventory investment.
43. The local Chevrolet dealership has an increase in inventory of 25 cars in 2003. In 2004 it sells all 25 cars.
a. The value of increased inventory will be counted as part of GDP in 2003, but the value of the cars sold in 2004
will not cause GDP to increase.
b. The value of the increased inventory will not affect 2003 GDP, but will be included in 2004 GDP.
c. The value of the increased inventory will be counted as 2003 GDP and the value of the cars sold in 2004 will
increase 2004 GDP.
ANSWER: a. The value of increased inventory will be counted as part of GDP in 2003, but the value of the cars sold in
2004 will not cause GDP to increase.
44. A movie company makes 500,000 DVDs of one of its latest releases. It sells 300,000 of them before the end of the
second quarter, and holds the others in its warehouse.
a. Since the DVDs will eventually be bought by consumers, they are included as consumption in the second
quarter.
b. Since the DVDs were not purchased this quarter, they will be counted as an increase in third-quarter GDP.
c. The DVDs will be counted as a change in inventory in the second quarter and so will be included in second-
quarter GDP.
d. The DVDs will be counted as a change in inventory in the second quarter, and when sold in the third quarter
will raise GDP.
ANSWER: c. The DVDs will be counted as a change in inventory in the second quarter and so will be included in
second-quarter GDP.
45. George buys and lives in a newly constructed home he paid $200,000 for in 2003. He sells the house in 2004 for
$225,0000.
a. The 2004 sale increases 2004 GDP by $225,000 and does nothing to 2003 GDP.
b. The 2004 sale increases 2004 GDP by $25,000 and does nothing to 2003 GDP.
c. The 2004 sale does not increase 2004 GDP and does nothing to 2003 GDP.
d. The 2004 sale increases 2004 GDP by $225,000 and 2003 GDP is revised upward by $25,000.
ANSWER: c. The 2004 sale does not increase 2004 GDP and does nothing to 2003 GDP.
46. Darla, a Canadian citizen, only works in the United States. The value added to production from her employment is
a. included in both U.S. GDP and U.S. GNP.
b. included only in U.S. GDP.
c. included only in U.S. GNP.
d. not included in either U.S. GDP or U.S. GNP.
ANSWER: b. included only in U.S. GDP.
47. Greg, a U.S. citizen, works only in Canada. The value added to production from his employment is
a. included in both U.S. GDP and U.S. GNP.
b. included only in U.S. GDP.
c. included only in U.S. GNP.
d. not included in either U.S. GDP or U.S. GNP.
ANSWER: c. included only in U.S. GNP.
48. Anna, a U.S. citizen, works only in Germany. The value added to production from her employment is included
a. only in U.S. GDP.
b. only in German GDP.
c. in both German and U.S. GDP.
d. in neither German nor U.S. GDP.
ANSWER: b. only in German GDP.
49. An Italian company opens a pasta company in the U.S. The profits from this pasta company are included in
a. both U.S. and Italian GNP.
b. both U.S. and Italian GDP.
c. U.S. GDP and Italian GNP.
d. U.S. GNP and Italian GDP.
ANSWER: c. U.S. GDP and Italian GNP.
50. An American company owns a fast food restaurant in Romania. The value of goods and services it produces is
included
a. in both Romanian and U.S. GDP.
b. partly in Romanian GDP and partly in U.S. GDP.
c. in Romanian GDP, but not U.S. GDP.
d. in U.S. GDP, but not Romanian GDP.
ANSWER: c. in Romanian GDP, but not U.S. GDP.
51. Which of the following is included in GDP?

a. the sale of stocks and bonds
b. the sale of used goods
c. the sale of services such as visits to a doctor
ANSWER: c. the sale of services such as visits to a doctor
52. Which of the following is included in GDP?

a. the sale of stocks and bonds
b. the estimated rental value of owner occupied housing
c. unpaid production of goods and services at home
ANSWER: b. the estimated rental value of owner occupied housing
53. Which of the following is included in U.S. GDP?

a. goods produced by foreign citizens working in the United States
b. the difference in the price of the sale of an existing home and its original purchase price
c. known illegal activities
ANSWER: a. goods produced by foreign citizens working in the United States
54. Which of the following is counted in U.S. GDP?

a. final goods and services purchased by the government
b. both the peaches used by a bakery to make peach pies and the peach pies
c. goods and services produced by U.S. citizens working in foreign countries
ANSWER: a. final goods and services purchased by the government
55. Which of the following is counted in GDP?

a. the estimated value of housework
b. the value of illegally produced goods and services
c. the value of newly issued stocks and bonds
ANSWER: d. None of the above are correct.
56. U.S. GNP is calculated from U.S. GDP by

a. including income earned by foreigners in the United States and excluding income earned by U.S. citizens abroad.
b. including income earned by U.S. citizens abroad and excluding income earned by foreigners in the U.S.
c. including income earned by foreigners in the United States.
d. excluding income earned by U.S. citizens abroad.
ANSWER: b. including income earned by U.S. citizens abroad and excluding income earned by foreigners in the U.S.
57. How is NNP calculated?

a. by subtracting saving from the total income of citizens of a nation
b. by subtracting business expenses and taxes from the total profits earned by citizens of a nation
c. by subtracting depreciation from the total income of citizens of a nation
d. by subtracting depreciation from the total profits earned by citizens of a nation
ANSWER: c. by subtracting depreciation from the total income of citizens of a nation
58. In the national income accounts, depreciation is called

a. "consumption of fixed capital."
b. "total tax depreciation."
c. "consumption of circulating capital."
d. "loss due to wear.”
ANSWER: a. "consumption of fixed capital."
59. National income is defined as

a. all income produced within a country.
b. the total income earned by a nation’s residents from the production of goods and services within the borders of
the country.
c. the total income earned by a nation’s residents in the production of goods and services.
d. the income received by the national government.
ANSWER: c. the total income earned by a nation’s residents in the production of goods and services.
60. National income differs from net national product in that it includes business subsidies and excludes
a. profits of corporations.
b. indirect business taxes.
c. retained earnings of corporations.
d. depreciation.
ANSWER: b. indirect business taxes.
61. The income that households and noncorporate businesses receive is called
a. personal income.
b. proprietors’ income.
c. disposable personal income.
d. national income.
ANSWER: a. personal income.
62. Unlike national income, personal income

a. includes retained earnings, corporate income taxes and social insurance contributions, and excludes interest and
transfer payments received by households from government.
b. excludes retained earnings, corporate income taxes, social insurance contributions, and interest and transfer
payments received by households from government.
c. excludes retained earnings, corporate income taxes and social insurance contributions, and includes interest and
transfer payments received by households from government.
d. includes retained earnings, corporate income taxes, social insurance contributions, and interest and transfer
payments received by households from government.
ANSWER: c. excludes retained earnings, corporate income taxes and social insurance contributions, and includes
interest and transfer payments received by households from government.
63. Disposable personal income is the income that

a. households have left after paying taxes and non-tax payments to the government.
b. businesses have left after paying taxes and non-tax payments to the government.
c. households and noncorporate businesses have left after paying taxes and non-tax payments to the government.
d. households and businesses have left after paying taxes and non-tax payments to the government.
ANSWER: c. households and noncorporate businesses have left after paying taxes and non-tax payments to the
government.
64. Retained earnings are the part of income that

a. households retain after paying taxes.
b. businesses retain after paying taxes.
c. corporations pay to their owners in the form of dividends.
d. corporations do not pay to their owners in the form of dividends.
ANSWER: d. corporations do not pay to their owners in the form of dividends.
Use the following table to answer the next five questions.
GDP $110
Income Earned by Citizens Abroad $5
Income Foreigners Earn here $15
Depreciation $4
Indirect Business Taxes $6
Business Subsidies $2
Statistical Discrepancy $0
Retained Earnings $5
Corporate Income Taxes $6
Social Insurance Contributions $10
Interest Paid to Households by Government $5
Transfer Payments to Households from Government $15
Personal Taxes $30
Non-tax payments to Government $5
65. GNP for this economy is

a. $96.
b. $100.
c. $105.
d. $110.
ANSWER: b. $100.
66. NNP for this economy is

a. $100.
b. $96.
c. $90.
d. $88.
ANSWER: b. $96.
67. National income for this economy is

a. $96.
b. $92.
c. $90.
d. $88.
ANSWER: b. $92.
68. Personal Income for this economy is

a. $91.
b. $81
c. $80.
d. $51.
ANSWER: a. $91.
69. Disposable personal income for this economy is

a. $56.
b. $46.
c. $45.
d. $11.
ANSWER: a. $56.
70. The government reports that “GDP increased by 1.6 percent in the last quarter." This statement means that GDP
increased
a. by 6.4 percent for the year.
b. at an annual rate of 6.4 percent during the last quarter.
c. at an annual rate of 1.6 percent during the last quarter.
d. at an annual rate of .4 percent during the last quarter.
ANSWER: c. at an annual rate of 1.6 percent during the last quarter.
71. If the government reports that “GDP increased at an annual rate of 6.0 percent for the fourth quarter of 2002” then
GDP increased by
a. 6.0 percent during 2002.
b. 24.0 percent during 2002.
c. 6.0 percent during the fourth quarter.
d. 1.5 percent during the fourth quarter.
ANSWER: d. 1.5 percent during the fourth quarter.
72. Recent values of GDP suggest that in the fourth quarter U.S. GDP is about $10 trillion dollars.
a. This number reflects the actual amount of final goods and services produced in the fourth quarter.
b. To find the amount actually produced in that quarter we would have to divide by four because GDP is reported
at annual rates.
c. The amount actually produced in the fourth quarter is somewhat higher because GDP is seasonally adjusted and
nonseasonally adjusted GDP for the fourth quarter is typical higher.
d. To find the amount actually produced in that quarter would require both dividing it by about four and then
adding back in what had been removed for seasonal adjustment.
ANSWER: d. To find the amount actually produced in that quarter would require both dividing it by about four and
then adding back in what had been removed for seasonal adjustment.
73. In the United States real GDP is reported each quarter.

a. These numbers are adjusted to make them measure at annual and seasonally adjusted rates.
b. These numbers are adjusted to make them annual rates, but no adjustment for seasonal variations are made.
c. These numbers are quarterly rates that have been seasonally adjusted.
d. These numbers are at quarterly rates and have not been seasonally adjusted.
ANSWER: a. These numbers are adjusted to make them measure at annual and seasonally adjusted rates.
74. In the nation of Ophelia, quarterly GDP is always higher in the second quarter than in other quarters. In order to
account for this predictable jump in GDP, Ophelia’s government statisticians will
a. make sure to account for inventory changes during the second quarter.
b. report real GDP, not nominal GDP.
c. focus on GNP rather than GDP during the second quarter.
d. make a seasonal adjustment for the second quarter data.
ANSWER: d. make a seasonal adjustment for the second quarter data.
75. In computing GDP, investment is spending on

a. stocks, bonds, and other financial assets.
b. real estate and financial assets.
c. new capital equipment, inventories, and structures, including new housing.
d. capital equipment, inventories, and structures, excluding household purchases of new housing.
ANSWER: c. new capital equipment, inventories, and structures, including new housing.
76. Government purchases include spending on goods and services by

a. the federal government only.
b. state and federal governments only.
c. local, state and federal governments.
d. local and state governments, but not the federal government.
ANSWER: c. local, state and federal governments.
77. If you buy a burger and fries at your favorite fast food restaurant
a. neither GDP nor consumption spending will be affected because you would have eaten at home if you hadn't
eaten at the restaurant.
b. GDP will be higher, but consumption spending will be unchanged.
c. GDP will be unchanged, but consumption spending will be higher.
d. both GDP and consumption spending will be higher.
ANSWER: d. both GDP and consumption spending will be higher.
78. Consider two things that might be included in GDP: A. The estimated rental value of owner-occupied housing, and
B. Purchases of newly constructed homes.
a. Both A and B are included as consumption.
b. A is included as consumption, while B is included as investment.
c. B is included as consumption, while A is included as investment.
d. Only B is included in GDP and it is included as investment.
ANSWER: b. A is included as consumption, while B is included as investment.
79. When a firm produces consumer goods and adds some to inventory rather than selling it. It is
a. not counted in the current quarter GDP.
b. counted in the current quarter GDP as investment.
c. counted in the current quarter GDP as consumption.
d. counted in the current quarter GDP as a statistical discrepancy.
ANSWER: b. counted in the current quarter GDP as investment.
80. A firm produces consumer goods and adds some to inventory in the third quarter. In the fourth quarter the firm
sells the goods at a retail outlet which leaves their inventory diminished. As a result of these actions, what
component(s) of real GDP change in the fourth quarter?
a. only investment and it decreases
b. only consumption and it increases
c. Investment decreases and consumption increases.
d. None of the above is correct.
ANSWER: c. investment decreases and consumption increases.
81. A U.S. publisher purchases new computers. This purchase by itself makes
a. investment and GDP higher.
b. investment higher and leaves GDP unchanged.
c. investment higher and reduces GDP.
d. neither investment nor GDP higher.
ANSWER: a. investment and GDP higher.
82. A Minnesota farmer buys a new tractor made in Iowa by a German company. As a result
a. U.S. investment and GDP increase, but German GDP is unaffected.
b. U.S. investment and German GDP increase, but U.S. GDP is unaffected.
c. U.S. investment, U.S. GDP, and German GDP are unaffected, because tractors are intermediate goods.
d. U.S. investment, U.S. GDP, and German GDP all increase.
ANSWER: a. U.S. investment and GDP increase, but German GDP is unaffected.
83. If a U.S. citizen buys a television made in Korea by a Korean firm,

a. U.S. net exports decrease, and U.S. GDP decreases.
b. U.S. net exports are unaffected, and U.S. GDP decreases.
c. U.S. net exports are unaffected, and U.S. GDP is unaffected.
d. U.S. net exports decrease but U.S. GDP is unaffected.
ANSWER: d. U.S. net exports decrease but U.S. GDP is unaffected.
84. If a U.S. household buys a $75 handbag from Italy, U.S. consumption increases by $75, U.S.
a. imports increase by $75, and U.S. GDP increases by $75.
b. imports increase by $75, but U.S. GDP is unaffected.
c. imports are unaffected, and U.S. GDP is unaffected.
d. exports increase by $75, and U.S. GDP increases by $75.
ANSWER: b. imports increase by $75, but U.S. GDP is unaffected.
85. Steph buys a designer dress produced by an American-owned fashion shop in France. As a result, U.S. consumption
increases, U.S. net exports
a. decrease, U.S. GDP is unaffected, but U.S. GNP increases.
b. decrease, U.S. GDP increases, but U.S. GNP is unaffected.
c. decrease, U.S. GNP increases, but French GDP is unaffected.
d. are unaffected, U.S. GDP is unaffected, but French GDP increases.
ANSWER: a. decrease, U.S. GDP is unaffected, but U.S. GNP increases.
86. A German citizen buys an automobile produced in the United States by a Japanese company. As a result,
a. U.S. net exports increase, U.S. GNP and GDP are unaffected, Japanese GNP increases, German net exports
decrease, and German GNP and GDP are unaffected.
b. U.S. net exports, GNP, and GDP increase, Japanese GDP increases, German net exports decrease, and German
GDP is unaffected.
c. U.S. net exports and GDP increase, Japanese GNP increases, German net exports decrease, and German GDP and
GNP are unaffected.
d. U.S. net exports, GNP, and GDP are unaffected, Japanese GNP increases, German net exports decrease, and
German GDP and GNP fall.
ANSWER: c. U.S. net exports and GDP increase, Japanese GNP increases, German net exports decrease, and German
GDP and GNP are unaffected.
87. After the terrorist attack on September 11, governments raised expenditures to increase security at airports. These
purchases of goods and services are
a. not included in GDP since they are not productive.
b. not included in GDP since the government will have to raise taxes to pay for them.
c. included in GDP since government expenditures are included in GDP.
d. included in GDP only to the extent that the Federal, and not state or local governments, paid for them.
ANSWER: c. included in GDP since government expenditures are included in GDP.
88. The U.S. Air Force pays a Turkish citizen $30,000 to work on a U.S. base in Turkey. As a result,
a. U.S. government purchases increase by $30,000 and U.S. net exports decrease by $30,000. U.S. GDP and GNP are
unaffected.
b. U.S. government purchases increase by $30,000 and U.S. GNP increases by $30,000. U.S. GDP and net exports are
unaffected.
c. U.S. government purchases, net exports, GDP, and GNP are unaffected.
d. U.S. government purchases increase by $30,000 and U.S. net exports decrease by $30,000. U.S. GNP increases by
$30,000, but U.S. GDP is unaffected.
ANSWER: a. U.S. government purchases increase by $30,000 and U.S. net exports decrease by $30,000. U.S. GDP and
GNP are unaffected.
89. A wind farm in Iowa buys a large turbine generator from a Swedish-owned factory located in Connecticut that uses
local workers.
a. U.S. investment, GDP, and GNP all increase by the same amount.
b. U.S. investment increases, but GDP and GNP are unaffected by the purchase.
c. U.S. investment and GDP increase by the same amount, but U.S. GNP increases by a smaller amount.
d. U.S. investment and GNP increase by the same amount, but U.S. GDP increases by a smaller amount.
ANSWER: c. U.S. investment and GDP increase by the same amount, but U.S. GNP increases by a smaller amount.
90. A transfer payment is

a. a payment for moving expenses a worker receives when he or she is transferred by an employer to a new
location.
b. a payment that is automatically transferred from your bank account to pay your utility bill.
c. the term that is used to indicate that your paycheck has been automatically deposited to your bank account.
d. a form of government spending that is not made in exchange for a currently produced good or service.
ANSWER: d. a form of government spending that is not made in exchange for a currently produced good or service.
91. Which of the following represents a transfer payment?

a. you transfer $1,000 from your bank account to a mutual fund.
b. the government sends your grandfather his Social Security check.
c. the bank transfers $10 quarterly interest to your savings account.
d. your employer automatically transfers $100 each month from your wages to a non-taxable medical spending
account.
ANSWER: b. the government sends your grandfather his Social Security check.
92. If the U.S. government pays an economist at the U.S. Department of Commerce $50,000 in salary in 2003, and
$30,000 in retirement benefits in 2004
a. each payment will be included in GDP as government purchases for the respective years.
b. the 2003 payment is included in 2003 GDP as government purchases, but the 2004 payment is not included in
2004 GDP.
c. the 2003 payment is included in 2003 GDP as government purchases, and the 2004 payment is included in 2004
GDP as government transfer payments.
d. the 2003 payment is included in 2003 GDP as government purchases, and the 2004 payment is allocated to
previous years' GDP according to the amount of work performed each year.
ANSWER: b. the 2003 payment is included in 2003 GDP as government purchases, but the 2004 payment is not
included in 2004 GDP.
93. To encourage formation of small businesses, the government could provide subsidies; these subsidies would
a. be included in GDP because they are part of government expenditures.
b. be included in GDP because they are part of investment expenditures.
c. not be included in GDP because they are transfer payments.
d. not be included in GDP because the government raises taxes to pay for them.
ANSWER: c. not be included in GDP because they are transfer payments.
94. Transfer payments are

a. included in GDP because they represent income to individuals.
b. not included in GDP because they are not payments for currently produced goods or services.
c. included in GDP because the income will be spent for consumption.
d. not included in GDP because taxes will have to be raised to pay for them.
ANSWER: b. not included in GDP because they are not payments for currently produced goods or services.
95. Social Security payments are

a. included in GDP because they represent payment for work performed in the past.
b. included in GDP because they represent potential consumption.
c. excluded from GDP because they do not represent current government purchases of goods and services.
d. excluded from GDP because they are not private pensions.
ANSWER: c. excluded from GDP because they do not represent current government purchases of goods and services.
96. Unemployment compensation is

a. part of GDP because it represents income.
b. not part of GDP because it is a transfer payment.
c. part of GDP because the recipients must have worked in the past to qualify.
d. not part of GDP because the payments reduce business profits.
ANSWER: b. not part of GDP because it is a transfer payment.
97. Which of the following is included in U.S. GDP?

a. U.S. exports of goods and services
b. Social Security payments
c. the sale of used goods
ANSWER: a. U.S. exports of goods and services
98. Which of the following is included in the Consumption component of GDP?

a. Social Security payments
b. purchases of foreign goods and services
c. purchases of newly constructed homes
ANSWER: b. purchases of foreign goods and services
99. Which of the following is included in the investment component of GDP?

a. purchases of newly constructed homes
b. purchases of foreign capital goods such as industrial equipment
c. changes in inventory
100. Which of the following is included in the investment component of GDP?

a. purchases of stocks and bonds
b. purchases of capital equipment that were manufactured in a foreign country by a foreign firm
c. the estimated rental value of owner-occupied housing
ANSWER: b. purchases of capital equipment that were manufactured in a foreign country by a foreign firm.
101. Which of these would NOT be included in the component(s) listed after them?
a. Mary buys a skateboard manufactured in Germany—U.S. consumption and U.S. imports.
b. Shelly adds DVDs produced in the United States to her inventory—U.S. investment.
c. Emily receives her Social Security check—U.S. government expenditures.
ANSWER: c. Emily receives her social security check—U.S. government expenditures.
102. Which of these things would NOT be included in the components listed after them?
a. Ruth buys a motorcycle made in Japan to ride on her weekends off—U.S. consumption and U.S. import.
b. Shirley owns her own home which has an estimated rental value—U.S. consumption
c. Beverly buys a newly issued stock in a U.S. corporation—U.S. investment.
d. Samantha produces some art work but doesn’t sell them all in the current quarter and so adds them to her
inventory—investment.
ANSWER: c. Beverly buys a newly issued stock in a U.S. corporation—U.S. investment.
103. In 2001, U.S. GDP was about

a. $10.1 trillion.
b. $101 trillion.
c. $10.1 billion.
d. $101 billion.
ANSWER: a. $10.1 trillion.
104. In 1998, GDP per person in the United States was about
a. $104,000.
b. $63,000.
c. $36,000.
d. $24,000.
ANSWER: c. $36,000
105. In the United States in 2001, consumption represented approximately

a. 40 percent of GDP.
b. 50 percent of GDP.
c. 60 percent of GDP.
d. 70 percent of GDP.
ANSWER: c. 60 percent of GDP.
106. In 2001, U.S. net exports were

a. negative and about 10 percent the size of GDP.
b. negative and about 3 percent the size of GDP.
c. positive and about 3 percent the size of GDP.
d. positive and about 10 percent the size of GDP.
ANSWER: b. negative and about 3 percent the size of GDP.
107. In 2001, U.S. investment was about

ANSWER: d. 16 percent of GDP.
108. In 2001, U.S. government purchases of goods and services were about
ANSWER: c. 18 percent of GDP.
109. If in a given year an economy has consumption of $3000, investment of $2000, government purchases of $1500,
exports of $500, imports of $600, taxes of $1200, transfer payments of $400, and depreciation of $300, then GDP will
equal
a. $6400.
b. $7000.
c. $7600.
d. $8900.
e. $9500.
ANSWER: a. $6400.
110. In 2001 government purchases of goods and services were

a. larger than consumption, but smaller than investment.
b. larger than investment, but smaller than consumption.
c. smaller than both consumption and investment.
d. larger than both consumption and investment.
ANSWER: b. larger than investment, but smaller than consumption.
111. If total spending rises from one year to the next, then
a. the economy must be producing a larger output of goods and services.
b. prices at which goods and services are sold must be higher.
c. either the economy must be producing a larger output of goods and services, or the prices at which goods and
services are sold must be higher, or both.
d. employment or productivity must be rising.
ANSWER: c. either the economy must be producing a larger output of goods and services, or the prices at which
goods and services are sold must be higher, or both.
112. Real GDP

a. evaluates current production at current prices.
b. evaluates current production at the prices that prevailed in some specific year in the past.
c. is not a valid measure of the economy’s performance, since prices change from year to year.
d. is a measure of the value of goods only, hence, it excludes the value of services.
ANSWER: b. evaluates current production at the prices that prevailed in some specific year in the past.
113. Which of the following statements about GDP is most accurate?

a. Nominal GDP values production at current prices, while real GDP values production at constant prices.
b. Nominal GDP values production at constant prices, while real GDP values production at current prices.
c. Nominal GDP values production at market prices, while real GDP values production at the cost of the resources
used in the production process.
d. Nominal GDP consistently underestimates the value of production, while real GDP consistently overestimates
the value of production.
ANSWER: a. Nominal GDP values production at current prices, while real GDP values production at constant prices.
114. If real GDP doubles and the GDP deflator doubles, then nominal GDP will
a. stay the same.
b. double.
c. triple.
d. quadruple.
ANSWER: d. quadruple.
115. Consider the following table for the country of Ophir:
Year Nominal GDP GDP Deflator

2000 $4000 100
2001 $4100 105
2002 $4200 110
From this information we can conclude that real GDP was higher in
a. 2002 than in 2001, and real GDP in 2001 was higher than in 2000.
b. 2001 than in 2000, and real GDP in 2001 was higher than in 2002.
c. 2000 than in 2001, and real GDP in 2001 was higher than in 2002.
d. 2000 than in 2002, and real GDP in 2001 was higher than in 2000.
ANSWER: c. 2000 than in 2001, and real GDP in 2001 was higher than in 2002.
TYPE: M SECTION: 10.4 DIFFICULTY: 3
116. Suppose GDP consists of wheat and rice. In 2002, 20 bushels of wheat are sold at $4 per bushel, and 10 bushels of
rice are sold at $2 per bushel. If the price of wheat was $2 per bushel and the price of rice was $1 per bushel in 2001,
the base year, nominal 2002 GDP is
a. $100, real 2002 GDP is $50, and the GDP deflator is 50.
b. $50, real 2002 GDP is $100, and the GDP deflator is 200.
c. $100, real 2002 GDP is $50, and the GDP deflator is 200.
d. $40, real 2002 GDP is $100, and the GDP deflator is 50.
ANSWER: c. $100, real 2002 GDP is $50, and the GDP deflator is 200.
117. Suppose that the country of Samiam produces only eggs and ham. In 2002 it produced 100 units of eggs at $3 each
and 50 units of ham at $4 each. In 2001, the base year, eggs sold for $1.50 per unit and ham for $5.
a. Nominal 2002 GDP is $500, real 2002 GDP is $400, and the GDP deflator is 80.
b. Nominal 2002 GDP is $500, real 2002 GDP is $400 and the GDP deflator is 125.
c. Nominal 2002 GDP is $400, real 2002 GDP is $400, and the GDP deflator is 100.
d. Nominal 2002 GDP is $400, real 2002 GDP is $500, and the GDP deflator is 125.
ANSWER: b. Nominal 2002 GDP is $500, real 2002 GDP is $400 and the GDP deflator is 125.
118. In the country of Mainia, GDP consists of cranberries and maple syrup. In 2002, 50 units of cranberries are sold at
$20 per unit, and 100 units of maple syrup are sold at $10 per unit. If the price of cranberries was $10 per unit and
the price of maple syrup was $15.00 per unit in 2001, the base year, then nominal 2002 GDP is
a. $2,000, real 2002 GDP is $2,000, and the GDP deflator is 100.
b. $2,000, real 2002 GDP is $2,500, and the GDP deflator is 125.
c. $2,500, real 2002 GDP is $2,000, and the GDP deflator is 83.3.
ANSWER: a. $2,000, real 2002 GDP is $2,000, and the GDP deflator is 100.
119. Suppose that Wisconsin produces cheese and fish. In 2002, 20 units of cheese are sold at $5 each, and 8 units of fish
are sold at $50 each. In 2001, the base year, the price of cheese was $10 per unit, and the price of fish was $75 per
unit.
a. Nominal 2002 GDP is $800, real 2002 GDP is $500, and the GDP deflator is 160.
b. Nominal 2002 GDP is $500, real 2002 GDP is $800, and the GDP deflator is 160.
c. Nominal 2002 GDP is $500, real 2002 GDP is $800, and the GDP deflator is 62.5.
d. Nominal 2002 GDP is $800, real 2002 GDP is $500, and the GDP deflator is 62.5.
ANSWER: c. Nominal 2002 GDP is $500, real 2002 GDP is $800, and the GDP deflator is 62.5.
120. Real GDP is the production of final goods and services valued at
a. current year prices.
b. constant prices.
c. future year prices.
d. the ratio of current year prices to constant year prices.
ANSWER: b. constant prices.
121. Which statement represents most correctly the relationship between nominal GDP and real GDP?
a. Nominal GDP measures base-year production using base-year prices, while real GDP measures current
production using current prices.
b. Nominal GDP measures current production using base-year prices, while real GDP measures current production
using current prices.
c. Nominal GDP measures current production using current prices, while real GDP measures current production
using base-year prices.
d. Nominal GDP measures current production using current prices, while real GDP measures base-year production
using base-year prices.
ANSWER: c. Nominal GDP measures current production using current prices, while real GDP measures current
production using base-year prices.
122. Which of the following statements about nominal GDP and real GDP is most accurate?
a. Nominal GDP is a better gauge of economic well-being than is real GDP.
b. Real GDP is a better gauge of economic well-being than is nominal GDP.
c. Real GDP and nominal GDP are equally good measures of economic well-being.
d. Whether real GDP or nominal GDP is a better measure of economic well-being depends on what sort of goods
are produced.
ANSWER: b. Real GDP is a better gauge of economic well-being than is nominal GDP.
123. When economists talk about growth in the economy, they measure that growth with the
a. absolute change in nominal GDP.
b. percentage change in real GDP.
c. absolute change in real GDP.
d. percentage change in nominal GDP.
ANSWER: b. percentage change in real GDP.
124. The GDP deflator is the ratio of

a. real GDP to nominal GDP.
b. real GDP to nominal GDP multiplied by 100.
c. nominal GDP to real GDP.
d. nominal GDP to real GDP multiplied by 100.
ANSWER: d. nominal GDP to real GDP multiplied by 100.
125. If nominal GDP is $10 trillion and real GDP is $8 trillion, the GDP deflator is
a. 0.8.
b. 1.25.
c. 80.
d. 125.
ANSWER: d. 125.
126. If the GDP deflator is 200 and nominal GDP is $10,000 billion, then real GDP is
a. $5,000 billion.
b. $2,000 billion.
c. $50 billion.
ANSWER: a. $5,000 billion.
127. If a small country has current nominal GDP of $20 billion and a GDP deflator of 50, what is its real GDP?
a. $100 billion
b. $40 billion
c. $10 billion
d. $4 billion
ANSWER: b. $40 billion
128. If a small country has current nominal GDP of $25 billion and the GDP deflator is 125, what is real GDP?
a. $312.5 billion
b. $207.5 billion
c. $31.25 billion
d. $20 billion
ANSWER: d. $20 billion
129. If a country reported nominal GDP of 100 billion in 2002 and 75 billion in 2001 and reported a GDP deflator of 125 in
2002 and a deflator of 120 in 2001 then from 2001 to 2002 real output
a. and prices both rose.
b. rose and prices fell.
c. fell and prices rose.
d. and prices both fell.
ANSWER: a. and prices both rose.
130. If a country reported nominal GDP of 200 billion in 2002 and 180 billion in 2001 and reported a GDP deflator of 125
in 2002 and of 105 in 2001, then from 2001 to 2002 real output
ANSWER: c. fell and prices rose.
131. If a country reported a nominal GDP of 115 billion in 2002 and 125 billion in 2001 and reported a GDP deflator of 85
in 2002 and a deflator of 100 in 2001, then from 2001 to 2002 real output
ANSWER: b. rose and prices fell.
132. If a country reported a nominal GDP of 85 billion in 2002 and 100 billion in 2001 and reported a GDP deflator of 100
in 2002 and of 105 in 2001, then from 2001 to 2002 real output
ANSWER: d. and prices both fell.
133. The GDP deflator can be used to identify the

a. increase in nominal GDP that is due to an increase in prices rather than an increase in production.
b. increase in real GDP that is due to an increase in prices rather than an increase in production.
c. increase in the cost of living for typical U.S. consumers.
d. reduction in government spending required to balance the federal budget.
ANSWER: a. increase in nominal GDP that is due to an increase in prices rather than an increase in production.
134. Dave, a student who knits ski caps with tassels and sells them on the Quad, sells the same number of caps this year
as last year, but at 20 percent higher prices.
a. He must be better off than last year because his income is higher.
b. He cannot be better off than last year because he sold the same number of caps both years.
c. We do not have enough information to tell whether he is better off this year than last year.
d. He is better off this year only if there was no inflation over the past year.
ANSWER: c. We do not have enough information to tell whether he is better off this year than last year.
135. A farmer produces the same output in 2004 as in 2003. His input prices increase by 50 percent, but so does his
product price. We can conclude that
a. the farmer is better off in 2004.
b. the farmer was better off in 2004.
c. the farmer is equally well off in 2004 as in 2003.
d. we cannot tell whether the farmer is better off in 2004 or in 2003 without additional information.
ANSWER: d. we cannot tell whether the farmer is better off in 2004 or in 2003 without additional information.
136. Which of the following is a correct statement about the growth of real GDP in the U.S. economy?
a. Real GDP in 2001 was more than twice its level in 1970.
b. The output of goods and services grew on average about 3 percent per year from 1970 to 2001.
c. Continued growth in real GDP enables the typical American to enjoy greater economic prosperity than did his or
her parents and grandparents.
137. Which of the following statements about the growth of real GDP in the U.S. economy is incorrect?
a. Real GDP grew on average about 3 percent per year from 1970 to 2001.
b. The growth in real GDP measures the growth in the output of goods and services.
c. The growth of real GDP has been steady over time.
d. None of the above is correct.
ANSWER: c. The growth of real GDP has been steady over time.
138. Recessions are associated with which of the following?

a. increased bankruptcies
b. falling profits
c. falling output
139. 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. GDP per person.
b. the consumption component of GDP.
c. government expenditures per person.
d. the level of business investment.
ANSWER: a. GDP per person.
140. During a presidential campaign, the incumbent argues that he should be reelected because GDP grew by 12 percent
during his 4-year term in office. You know that population grew by 4 percent over the period, and that the GDP
deflator increased by 6 percent during the past 4 years. You should conclude that real GDP per person
a. grew by more than 12 percent.
b. grew, but by less than 12 percent.
c. was unchanged.
d. decreased.
ANSWER: b. grew, but by less than 12 percent.
141. The information below was reported by the World Bank. On the basis of this information, which list below contains
the correct ordering of GDP per person from highest to lowest?
Country Nominal GDP 2000 Population 200

Japan $4,800,000 million 127 million
Switzerland $240,000 million 7.2 million
United States $9,800,000 million 280 million
a. Japan, Switzerland, United States

b. Japan, United States, Switzerland
c. United States, Switzerland, Japan
d. United States, Japan, Switzerland
ANSWER: b. Japan, United States, Switzerland
142. The information below was reported by the World Bank. On the basis of this information, which list below contains
the correct ordering of GDP per person from highest to lowest?
Country Nominal GDP 2000 Population 2000

Kenya $10,400 million 30.1 million
Tanzania $9,000 million 33.7 million
Zimbabwe $7,200 million 12.6 million
a. Kenya, Tanzania, Zimbabwe

b. Kenya, Zimbabwe, Tanzania
c. Zimbabwe, Kenya Tanzania
d. Zimbabwe, Tanzania, Kenya
ANSWER: c. Zimbabwe, Kenya Tanzania
143. 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 providing these other attributes is 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 the things that contribute to welfare.
d. However, GDP is still the best measure of society’s welfare because these other values cannot actually be
measured.
ANSWER: 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 the things that contribute to welfare.
144. Suppose that twenty-five years ago a country had nominal GDP of 1,000, a GDP deflator of 200, and a population of
100. Today they have nominal GDP of 3,000, a deflator of 400, and population of 150? What happened to the real
GDP per person?
a. It more than doubled.
b. It rose, but less than doubled.
c. It was unchanged.
d. It fell.
ANSWER: c. It was unchanged.
145. Suppose that over the last twenty-five years a country’s nominal GDP grew to three times its former size. In the
meantime population grew 50 percent and prices rose 100 percent. What happened to real GDP per person?
a. It more than doubled.
b. It rose, but less than doubled.
c. It was unchanged.
d. It fell.
ANSWER: c. It was unchanged.
146. Real GDP in the United States is five times as great as it was 50 years ago, yet GDP weighs almost the same as it did
a half century ago and the population has less than doubled, these facts suggest that
a. consumers are being ripped off with lower quality goods.
b. we are no longer in danger of running out of raw materials.
c. each U.S. worker is more productive, and international trade is less expensive to conduct.
d. Americans are actually consuming fewer goods per person than they did 50 years ago.
ANSWER: c. each U.S. worker is more productive, and international trade is less expensive to conduct.
147. International studies of the relationship between GDP per person and quality of life measures such as life
expectancy and literacy rates show that larger GDP per person is associated with
a. longer life expectancy and a lower percentage of the population that is literate.
b. longer life expectancy and a higher percentage of the population that is literate.
c. very nearly the same life expectancy and a lower percentage of the population that is literate.
d. very nearly the same life expectancy and a higher percentage of the population that is literate.
ANSWER: b. longer life expectancy and a higher percentage of the population that is literate.
148. Which of the following statements is accurate?

a. In rich countries, people typically live into their late seventies, while in poor countries, people typically live only
until their fifties or early sixties.
b. In rich countries, almost all the population can read, while in poor countries, about half the population is
illiterate.
c. Poor countries tend to have higher infant mortality rates, higher maternal mortality, and higher rates of child
malnutrition than do rich countries.
149. International GDP and socioeconomic data

a. are inconclusive about the relationship between GDP and the economic well-being of citizens.
b. suggest that poor nations actually might enjoy a higher standard of living than do rich nations.
c. leave no doubt that a nation’s GDP is closely associated with its citizens’ standard of living.
d. indicate that there are few real differences in living standards around the world, in spite of the large differences
in GDP between nations.
ANSWER: c. leave no doubt that a nation’s GDP is closely associated with its citizens’ standard of living.
150. Being able to measure the behavior of the economy with statistics such as GDP
a. is useful only in the accounting sense.
b. is all that is necessary in order for us to be able to understand the macroeconomy.
c. can be helpful in developing macroeconomic science, but is not useful for policymaking.
d. is a crucial step toward developing the science of macroeconomics.
ANSWER: d. is a crucial step toward developing the science of macroeconomics.
True/False
1. Macroeconomic statistics include the inflation rate, the unemployment rate, GDP, and retail sales.
ANSWER: T
2. The basic tools of supply and demand analysis are as central to macroeconomic analysis as they are to
microeconomic analysis.
ANSWER: T
3. Income exceeds production.

ANSWER: F
4. GDP may be computed as either the production of, or the income generated by, the value of final goods and services
produced within an economy
ANSWER: T
5. U.S. GDP includes estimates of things such as unpaid housework and car maintenance.
ANSWER: F
6. U.S. GDP excludes the production of illegal goods.

ANSWER: T
7. When an American doctor opens a practice in Bermuda, his production there is part of U.S. GDP.
ANSWER: F
8. The government computes measures of income other than GDP, but they almost always all tell the same story about
the economy.
ANSWER: T
9. Expenditures by households on education services are included in the consumption component of GDP.
ANSWER: T
10. New home construction is included in the consumption component of GDP.

ANSWER: F
11. The government component of GDP includes salaries paid to Army generals but not Social Security benefits to the
elderly.
ANSWER: T
12. If someone in the United States buys a surfboard produced in Australia, that purchase is included in both the
consumption component of U.S. GDP and the import component of U.S. GDP.
ANSWER: T
13. Changes in inventory are included in the investment component of GDP.

ANSWER: T
14. An increase in nominal U.S. GDP necessarily implies that the United States is producing a larger output of goods
and services.
ANSWER: F
15. If nominal GDP is 10,000 and real GDP is 8,000 the GDP deflator is 125.
ANSWER: T
16. In 2001 the level of U.S. real GDP was more than double its 1970 level.
ANSWER: T
17. If GDP is higher in one country than another, we can be pretty sure that the standard of living is higher in the
country with the higher GDP.
ANSWER: F
18. GDP does not make adjustments for things like leisure time and environmental quality.
ANSWER: T
19. Even though GDP is not the only thing that affects the quality of life, it is a useful measure because it measures a
nation’s ability to purchase the inputs that can be used to produce things like good health and quality education.
ANSWER: T TYPE: TF DIFFICULTY: 2 SECTION: 23.4
SHORT ANSWER
1. 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.
ANSWER: GDP excludes some products because they are so difficult to measure. These products include services
performed by individuals for themselves and their families, and most goods that are produced and consumed at
home and, therefore, never enter the marketplace. In addition, illegal products are not included in GDP even if they
can be measured because, by society’s definition, they are bads, not goods.
TYPE: S DIFFICULTY: 2 SECTION: 10.2
2. Explain why the value of intermediate goods produced and sold during the year are not included separately as part
of GDP, but intermediate goods produced and not sold are included separately as part of GDP.
ANSWER: Intermediate goods produced and sold during the year are not included separately as part of GDP because the
value of those goods will be included in the value of the final goods produced from them. If the intermediate good is
produced but not sold during the year, its value is included as inventory investment for the year in which it was
produced. If inventory investment was not included as part of GDP, true production would be underestimated for
the year the intermediate good went into inventory, and overestimated for the year the intermediate good is used or
sold.
3. Since it is counted as investment, why doesn't the purchase of earthmoving equipment from China by a U.S.
corporation increase U.S. GDP?
ANSWER: The purchase of foreign equipment is counted as investment, but GDP measures only the value of production
within the geographic borders of the United States. In order to avoid including the value of the imported equipment,
imports are subtracted from GDP. Hence, the value of the equipment in investment is canceled by subtracting its
value as an import.
4. Identify the immediate effect of each of the following circumstances on U.S. 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.
ANSWER:
a. Since this is a transfer payment, there is no change to GDP or to any of its components.
b. Consumption and imports will rise and cancel each other out so that there is no change in U.S. GDP.
c. This increases the investment component of GDP and so increases GDP
5. Between 1929 and 1933 NNP 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 NNP from 1929 to1933?
b. What was the percentage decline in real NNP from 1929 to 1933? Show your work.
ANSWER:
a. NNP measured in current prices is nominal NNP. Nominal NNP fell from $96 billion to $48 billion, a decline of
50 percent.
b. Real NNP is nominal NNP divided by the price index and multiplied by 100. Real NNP in 1929 was ($96 b/100) x
100 = $96 b. Real NNP in 1933 was ($48 b/75) x 100 = $64 b. Real NNP fell from $96 billion to $64 billion, a decline
of 33 percent.
6. You find that your paycheck for the year is higher this year than last. Does that mean that your real income has
increased? Explain carefully.
ANSWER: Real income is nominal income adjusted for general increase in prices. If my paycheck is higher this year than
last, my nominal income has increased. Whether my real income has increased or not depends on what has
happened since last year to the level of prices of things I buy with my income. If the percentage increase in prices is
less than the percentage increase in my nominal income, then my real income has increased. Otherwise, my real
income has not increased.
7. U.S. 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 U.S. residents?
ANSWER: Since this is in real terms, it tells us that the U.S. is able to make a lot more stuff than in the past. Some of the
increase in real GDP is probably due to an increase in population, so we could say more if we knew what had
happened to real GDP per person.
Supposing that there was also an increase in real GDP per person, we can say that the standard of living has
risen. Material things are an important part of well-being. Having sufficient amounts of things such as food, shelter,
and clothing are fundamental to well-being. Other things such as security, a safe environment, access to safe water,
access to medical care, justice, and freedom also matter. However many of these things are more easily obtained by
being able to produce more using fewer resources. Countries with higher real GDP per person tend to have longer
life spans, less discrimination towards women, less child labor, and a higher rate of literacy.

Measuring A Nation's Income

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Measuring A Nation's Income

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Chapter 10

Measuring a Nation’s Income

4. Macroeconomics includes the study of topics such as

5. The goal of macroeconomics is

6. The basic tools of supply and demand are

8. Which of the following is correct for an economy?

9. Robert works as a lawyer.

10. If GDP rises,

14. The simple circular-flow diagram illustrates that

16. Production equals income because

17. Which of the following is the correct definition of GDP?

18. To compute GDP we

21. Which of the following is not included in GDP?

36. Which of the following is correct?

39. Grapes are

51. Which of the following is included in GDP?

52. Which of the following is included in GDP?

53. Which of the following is included in U.S. GDP?

54. Which of the following is counted in U.S. GDP?

55. Which of the following is counted in GDP?

56. U.S. GNP is calculated from U.S. GDP by

57. How is NNP calculated?

58. In the national income accounts, depreciation is called

59. National income is defined as

62. Unlike national income, personal income

63. Disposable personal income is the income that

64. Retained earnings are the part of income that

65. GNP for this economy is

66. NNP for this economy is

67. National income for this economy is

68. Personal Income for this economy is

69. Disposable personal income for this economy is

73. In the United States real GDP is reported each quarter.

75. In computing GDP, investment is spending on

76. Government purchases include spending on goods and services by

83. If a U.S. citizen buys a television made in Korea by a Korean firm,

90. A transfer payment is

91. Which of the following represents a transfer payment?

94. Transfer payments are

95. Social Security payments are

96. Unemployment compensation is

97. Which of the following is included in U.S. GDP?

98. Which of the following is included in the Consumption component of GDP?

99. Which of the following is included in the investment component of GDP?

100. Which of the following is included in the investment component of GDP?

103. In 2001, U.S. GDP was about

105. In the United States in 2001, consumption represented approximately

106. In 2001, U.S. net exports were

107. In 2001, U.S. investment was about

110. In 2001 government purchases of goods and services were

112. Real GDP

113. Which of the following statements about GDP is most accurate?

115. Consider the following table for the country of Ophir:

Year Nominal GDP GDP Deflator

124. The GDP deflator is the ratio of

133. The GDP deflator can be used to identify the

138. Recessions are associated with which of the following?

Country Nominal GDP 2000 Population 200