ECW1102 Weekly Exercises

Week 1- Measuring a Nation's Income

The Economy's Income and Expenditure

1. Gross domestic product measures two things at once:

a. the total spending of everyone in the economy and the total saving of everyone in the economy.
b. the total income of everyone in the economy and the total expenditure on the economy's output of
goods and services.
c. the value of the economy's output of goods and services for domestic citizens and the value of the
economy's output of goods and services for the rest of the world.
d. the total income of households in the economy and the total profit of firms in the economy.

2. For an economy as a whole,

a. wages must equal profit.
b. consumption must equal saving.
c. income must equal expenditure.
d. the number of buyers must equal the number of sellers.

3. For an economy as a whole, income must equal expenditure because

a. the number of firms is equal to the number of households in an economy.
b. international law requires that income equal expenditure.
c. every dollar of spending by some buyer is a dollar of income for some seller.
d. every dollar of saving by some consumer is a dollar of spending by some other consumer.

4. If an economy’s GDP rises, then it must be the case that the economy’s
a. income rises and saving falls.
b. income and saving both rise.
c. income rises and expenditure falls.
d. income and expenditure both rise.

5. Because every transaction has a buyer and a seller,

a. GDP is more closely associated with an economy’s income than it is with an economy’s
expenditure.
b. every transaction contributes equally to an economy’s income and to its expenditure.
c. the number of firms must be equal to the number of households in a simple circular-flow diagram.
d. firms’ profits are necessarily zero in a simple circular-flow diagram.

6. Which of the following statements about GDP is correct?

a. GDP measures two things at once: the total income of everyone in the economy and the total
expenditure on the economy’s output of goods and services.
b. Money continuously flows from households to firms and then back to households, and GDP
measures this flow of money.
c. GDP is generally regarded as the best single measure of a society’s economic well-being.
d. All of the above are correct.

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7. In a simple circular-flow diagram,
a. households spend all of their income.
b. all goods and services are bought by households.
c. expenditures flow through the markets for goods and services, while income flows through the
markets for the factors of production.
d. All of the above are correct.

8. In a simple circular-flow diagram, firms use the money they get from a sale to
a. pay wages to workers.
b. pay rent to landlords.
c. pay profit to the firms’ owners.
d. All of the above are correct.

The Measurement of Gross Domestic Product

9. Gross domestic product is defined as
a. the quantity of all final goods and services demanded within a country in a given period of time.
b. the quantity of all final goods and services supplied within a country in a given period of time.
c. the market value of all final goods and services produced within a country in a given period of time.
d. Both (a) and (b) are correct.

10. Which of the following is correct?

a. The market value of rental housing services is included in GDP, but the market value of owner-
occupied housing services is not.
b. The market value of owner-occupied housing services is included in GDP, but the market value of
rental housing services is not.
c. The market values of both owner-occupied housing services and rental housing services are
included in GDP.
d. Neither the market value of owner-occupied housing services nor the market value of rental
housing services is included in GDP.

11. The value of the housing services provided by the economy's owner-occupied houses is
a. included in GDP, and the estimated rental values of the houses are used to place a value on these
housing services.
b. included in GDP, and the actual mortgage payments made on the houses are used to estimate the
value of these rental services.
c. excluded from GDP since these services are not sold in any market.
d. excluded from GDP since the value of these housing services cannot be estimated with any degree
of precision.

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12. James owns two houses. He rents one house to the Johnson family for $10,000 per year. He lives in the other
house. If he were to rent the house in which he lives, he could earn $12,000 per year in rent by doing so. How
much do the housing services provided by the two houses contribute to GDP?
a. $0
b. $10,000
c. $12,000
d. $22,000

13. Over the last few decades, Malaysians have chosen to cook less at home and eat more at restaurants. This
change in behavior, by itself, has
a. reduced measured GDP.
b. not affected measured GDP.
c. increased measured GDP only to the extent that the value of the restaurant meals exceeded the
value of meals previously cooked at home.
d. increased measured GDP by the full value of the restaurant meals.

14. If a state made a previously-illegal activity, such as gambling or prostitution, legal, then, other things equal,
GDP
a. necessarily decreases.
b. necessarily increases.
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.

15. In 2012, Corny Company grows and sells $2 million worth of corn to Tasty Cereal Company, which makes corn
flakes. Tasty Cereal Company produces $6 million worth of corn flakes in 2012, with sales of $4.5 million to
households during the year. The unsold $1.5 million worth of corn flakes remains in Tasty Cereal Company’s
inventory at the end of 2012. The transactions just described contribute how much to GDP for 2012?
a. $4.5 million
b. $6 million
c. $6.5 million
d. $8 million

16. Which of the following events would cause GDP for 2012 to increase?
a. In February 2012, Amanda sells a 2006 Honda Accord to Isabella.
b. In February 2012, Amanda buys a ticket to visit a zoo in Florida. She visits the zoo in April 2012.
c. In December 2012, Isabella eats onions that she harvested from her backyard garden in October
2012.
d. All of the above are correct.

17. Consider two cars manufactured by Chevrolet in 2007. During 2007, Chevrolet sells one of the two cars to
Sean for $24,000. Later in the same year, Sean sells the car to Kati for $19,000. The second automobile, with a
market value of $30,000, is unsold at the end of 2007 and it remains in Chevrolet’s inventory. The transactions
just described contribute how much to GDP for 2007?
a. $24,000
b. $43,000
c. $54,000
d. $73,000

18. Which of the following items is included in Malaysian GDP?

a. goods produced by foreign citizens working in Malaysia
b. the difference in the price of the sale of an existing home and its original purchase price
c. known illegal activities
d. None of the above is included in Malaysian GDP.

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19. An Italian company operates a pasta restaurant in the U.S. The value of the output produced by this pasta
restaurant is included in
a. U.S. GNP and Italian GNP.
b. U.S. GNP and Italian GDP.
c. U.S. GDP and Italian GNP.
d. U.S. GDP and Italian GDP.

20. Gina, a U.S. citizen, works only in Germany. The value of Gina’s production is included in
a. U.S. GDP and German GDP.
b. U.S. GDP and German GNP.
c. U.S. GNP and German GDP.
d. U.S. GNP and German GNP.

The Components of GDP

21. Household spending on education is included in
a. consumption, although it might be argued that it would fit better in investment.
b. investment, although it might be argued that it would fit better in consumption.
c. government spending, based on the fact that most higher-education students attend publicly-
supported colleges and universities.
d. None of the above is correct; in general, household spending on services is not included in any
component of GDP.

22. Household spending on education is counted in which component or subcomponent of GDP?

a. consumption of durable goods
b. consumption of nondurable goods
c. consumption of services
d. investment

23. Which of the following items is the one type of household expenditure that is categorized as investment rather
than consumption?
a. spending on education
b. the purchase of stocks and bonds
c. the purchase of a new house
d. the purchase of durable goods such as stoves and washing machines

24. Consider two items that might be included in GDP: (1) the estimated rental value of owner-occupied housing
and (2) purchases of newly-constructed homes. How are these two items accounted for when GDP is
calculated?
a. Both item (1) and item (2) are included in the consumption component of GDP.
b. Item (1) is included in the consumption component of GDP, while item (2) is included in the
investment component of GDP.
c. Item (1) is included in the investment component of GDP, while item (2) is included in the
consumption component of GDP.
d. Only item (2) is included in GDP, and it is included in the investment component.

25. Government purchases include spending on goods and services by

a. federal governments, but not by state or local governments.
b. federal and state governments, but not by local governments.
c. federal, state, and local governments.
d. federal, state, and local governments, as well household spending by employees of those
governments.

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26. Transfer payments
a. are payments that flow from government to households.
b. are not made in exchange for currently produced goods or services.
c. alter household income, but they do not reflect the economy’s production.
d. All of the above are correct.

27. 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 in quarterly interest to your savings account.
d. Your employer automatically transfers $100 each month from your wages to a non-taxable medical
spending account.

28. Which of the following items is counted as part of government purchases?

a. The federal government pays $2,000 in Social Security benefits to a retired person.
b. The city of Des Moines, Iowa pays $10,000 to a tree-trimming firm to trim trees along city
boulevards.
c. The state of Iowa pays $1,000 to help a low-income family pay its medical bills.
d. All of the above are correct.

Real versus Nominal GDP

29. Which of the following is correct?

a. Nominal GDP never equals real GDP.
b. Nominal GDP always equals real GDP.
c. Nominal GDP equals real GDP in the base year.
d. Nominal GDP equals real GDP in all years but the base year.

30. Changes in nominal GDP reflect

a. only changes in prices.
b. only changes in the amounts being produced.
c. both changes in prices and changes in the amounts being produced.
d. neither changes in prices nor changes in the amounts being produced.

31. Changes in real GDP reflect

a. only changes in prices.
b. only changes in the amounts being produced.
c. both changes in prices and changes in the amounts being produced.
d. neither changes in prices nor changes in the amounts being produced.

32. When economists talk about growth in the economy, they measure that growth as the
a. absolute change in nominal GDP from one period to another.
b. percentage change in nominal GDP from one period to another.
c. absolute change in real GDP from one period to another.
d. percentage change in real GDP from one period to another.

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The table below contains data for the country of Dachsland, which produces only pretzels and books. The base year
is 2005.
Table 1
Year Price Quantity Price Quantity
of of of of
Pretzels Pretzels Books Books
2005 $4.00 90 $1.50 150
2006 $4.00 100 $2.00 180
2007 $5.00 120 $2.50 200
2008 $6.00 150 $3.50 200

33. Refer to Table 1. In 2005, Dachsland’s

a. nominal GDP was greater than real GDP, and the GDP deflator was greater than 100.
b. nominal GDP was equal to real GDP, and the GDP deflator was equal to 1.
c. nominal GDP was less than real GDP, and the GDP deflator was less than 100.
d. nominal GDP was equal to real GDP, and the GDP deflator was equal to 100.

34. Refer to Table 1. In 2008, Dachsland’s

a. nominal GDP was $585, real GDP was $900, and the GDP deflator was 65.
b. nominal GDP was $585, real GDP was $1065, and the GDP deflator was 54.9.
c. nominal GDP was $1600, real GDP was $900, and the GDP deflator was 177.8.
d. nominal GDP was $1600, real GDP was $1065, and the GDP deflator was 150.2.

35. Refer to Table 1. Dachsland’s real GDP was

a. $585 in 2006, $585 in 2007, and $585 in 2008.
b. $660 in 2006, $825 in 2007, and $1065 in 2008.
c. $670 in 2006, $780 in 2007, and $900 in 2008.
d. $760 in 2006, $1100 in 2007, and $1600 in 2008.

36. Refer to Table 1. Dachsland’s output grew

a. 29.9% from 2005 to 2006.
b. 33.3% from 2006 to 2007.
c. 24.3% from 2006 to 2007.
d. 15.4% from 2007 to 2008.

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Suggested Answers

1. B
2. C
3. C
4. D
5. B
6. D
7. D
8. D
9. C
10. C
11. A
12. D
13. D
14. B
15. B
16. B
17. C
18. A
19. C
20. C
21. A
22. C
23. C
24. B
25. C
26. D
27. B
28. B
29. C
30. C
31. B
32. D
33. D
34. C
35. C
36. D

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