Tutorial 1: Measuring National Income

Answer ALL Multiple-Choice Questions.

1. Which model is used to show the flows of money, factors of production, and goods and
services in the economy?
A. The Phillips curve model
B. The model of production possibilities
C. The circular-flow model
D. The AD-AS model
E. The rational expectations model
2. A household

spends

money on ___________________ and in exchange sells

_______________ to firms.
A. revenue; services
B. goods and services; factors of production
C. imports and exports; taxes and transfers
D. bonds; stocks
E. goods and services; revenue
3. GDP measures ________________________________.
I.
production
II.
income earned during the production process
III.
spending by consumers, businesses, governments and foreigners
A. I only
B. II only
C. III only
D. I and II only
E. I, II and III
4. In a specified period of time, a nations gross domestic product (GDP) is the
___________________________.
A. total value of government spending, minus taxes collected
B. total value of all final goods and services produced within the nations borders
C. total value of all intermediate goods and services produced within the nations borders
D. total disposable income earned by households in the nation
E. total value of all final goods and services produced by a nations citizens, regardless their
geographic location
5. GDP includes final goods and services, but not intermediate goods because
A. intermediate goods are not part of investment spending
B. the value of the intermediate goods is already included in the value of the final goods
C. the value of the intermediate goods is already included as inventory investment
D. intermediate goods are only produced by government
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E. intermediate goods are not current production

6. Which of the following would be an intermediate good?
A. Your vacation to the island of Yap
B. A visit to the doctor before a tropical vacation
C. A new skateboard your brother bought
D. Gasoline purchased for your car
E. Coal used in generating electricity
7. When computing the value of a nations domestic output of goods and services, we can add
up all of the income earned by the factors of production in the economy. In this way, we are
calculating national output with the ____________________________.
A. expenditure approach
B. value-added approach
C. income approach
D. public sector approach
E. national savings approach
8. When computing the value of a nations domestic output of goods and services, we can add
up all of the spending done by all sectors in the economy. In this way, we are calculating
national output with the _______________________________.
A. expenditure approach
B. value-added approach
C. income approach
D. public sector approach
E. national savings approach
9. A nations gross domestic product (GDP) can be determined with which simple formula?
A. GDP = C + I + G
B. GDP = C + I + G + X
C. GDP = C + I + G + (X M)
D. GDP = C I + G + (M X)
E. GDP = S + I
10. U.S imports are
A. not added to U.S GDP because they are produced abroad
B. added to U.S GDP because they are consumed domestically
C. added to U.S GDP because they represent an increase in inventories
D. added to U.S GDP as government purchases because the government decides what goods
may be imported
E. not added to U.S GDP because they are intermediate goods
11. Transfer payments refer to payments made
A. as compensation to workers
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B.
C.
D.
E.

without any exchange of goods and services

via online banking
to workers on transfer from one job to another
none of the above

12. Bob the farmer grows some vegetables for personal consumption. This activity is
__________ from the GDP _________________.
A. excluded; because it involves production
B. excluded; as no market transaction is involved
C. excluded; to avoid the double counting problem
D. excluded; as it involves a non-productive activity
E. excluded; because it involves household consumption
13. Suppose we know that gross domestic product (GDP) is $10,000 and that consumption
spending is $7,000, investment spending is $1,500 and government spending is $2,500. We
can determine that ________________________.
A. net exports are equal to -$100
B. export spending is $1,000 and import spending is $0
C. export spending is $1,000 and import spending is $1,000
D. net exports are equal to -$1,000
E. net exports are equal to $1,000
14. During 2010 the country of Erickburg had government spending of $3 billion, spending by
households of $9 billion, investment spending of $3.5 billion and net exports of -$1.5 billion.
Determine the share of consumption spending to GDP of Ericksburg.
A. 64.3%
B. 52.9%
C. 21.4%
D. 20.6%
E. 85.7%
15. In 2008 Jackie bought a 1968 Ford Mustang for $40,000. When it was new, the Mustang sold
for $5,000. How much did the Ford Mustang contribute to GDP in 2008?
A. $40,000
B. $35,000
C. $45,000
D. $5,000
E. $0
16. A farmer grows a bushel of wheat and sells it to a miller for $1. The miller turns the wheat
into flour and then sells the flour to a baker for $3. The baker uses the flour to make bread

and sells the bread to an engineer for $6. The engineer consumes the bread. Determine the
gross domestic product (GDP) in this economy.
A. $1
B. $3
C. $6
D. $10
E. Cannot be determined exactly because the output produced is not given
17. Which of the following would be classified as consumption spending (C)?
A. The state of Oklahoma buys some police cars
B. Ellie enrolls in some classes at the University of Oklahoma
C. A firm in Canada buys some cattle raised in Oklahoma
D. A cattle rancher in Oklahoma builds a new barn
E. The US Air Force builds a new base in Oklahoma
18. Which of the following is not considered a component of investment when calculating GDP?
A. new residential construction
B. construction of new factories
C. net increases in inventory
D. purchases of corporate stock
E. production of new equipment
19. In calculating national income, the construction of a public hospital is classified as a(n)
A. investment expenditure
B. government expenditure
C. private consumption expenditure
D. import expenditure
E. transfer payment
20. Cans of chili are produced in December 2011 but not sold to a grocery store until January
2012. These unsold cans of chili count _________________________________.
A. in 2011 GDP as inventories and are part of consumption spending
B. in 2011 GDP as consumption spending
C. in 2011 GDP as inventories and are part of investment spending
D. in 2012 GDP as inventories and are part of investment spending
E. in 2011 GDP as intermediate goods and in 2012 GDP as final goods
21. When an American household purchases a bottle of Italian wine for $100,
A. US consumption does not change, US net exports decrease by $100 and US GDP
decreases by $100.
B. US consumption does not change, US net exports increase by $100 and US GDP
increases by $100.
C. US consumption increases by $100, US net exports decrease by $100 and US GDP does
not change.
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D. US consumption increases by $100, US net exports do not change and US GDP increases
by $100.
E. US consumption decreases by $100, US net exports increases by $100 and US GDP does
not change.
22. Which of the following events will have no effect on GDP?
A. The Department of Transportation repaves a road.
B. A college buys computers from Dell.
C. Your father buys a bottle of French wine.
D. Sarah grows cabbage at her backyard.
E. An artist makes a music CD that sells millions of copies worldwide.
23. Which of the following will have an effect on GDP?
A. You lose $50 betting with a friend.
B. You fix your brothers car without buying any new parts.
C. Your fathers firm makes computers and exports them to China.
D. You buy 1000 shares of stock in a corporation.
E. Your wealthy uncle buys a painting by Picasso.
Table 1: GDP in a Peaches and Herbs Economy
________________________________________________________________________
Year
Price of
Quantity of Peaches
Price of
Quantity of Herbs
Peaches

Produced

Herbs

Produced

________________________________________________________________________
2006
$1
10
$0.50
20
2007
$2
10
$0.50
24
2008
$3
5
$1
30
2009
$3
15
$2
40
_________________________________________________________________________
24. Table 1 shows the prices and outputs of an economy that produces only two goods, peaches
and herbs. What is nominal gross domestic product (GDP) in 2007?
A. $32
B. $20
C. $24
D. $75
E. $44
25. Table 1 shows the prices and output of an economy that produces only two goods, peaches
and herbs. What is real gross domestic product (GDP) in 2007, using 2006 as a base year?
A. $32
B. $22
C. $24
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D. $20
E. $44
26. Table 1 shows the prices and outputs of an economy that produces only two goods, peaches
and herbs. Between 2006 and 2008, real gross domestic product (GDP) increased by
____________.
A. 5%
B. 45%
C. 0%
D. 125%
E. 25%
27. If nominal GDP equals $6,000 and the GDP deflator equals 200, then real GDP equals
___________________.
A. $30
B. $3,000
C. $12,000
D. $1,200
E. $1,200,000
28. Changes in nominal GDP reflect __________________________.
A. only changes in prices
B. only changes in the amount being produced
C. only changes in the total expenditures but not total income
D. both changes in prices and changes in the amount being produced
E. neither changes in prices nor changes in the amount being produced
29. Changes in real GDP reflect __________________________.
A. only changes in prices
B. only changes in the amount being produced
C. only changes in the total expenditures but not total income
D. both changes in prices and changes in the amount being produced
E. neither changes in prices nor changes in the amount being produced
30. Changes in the GDP deflator reflect ___________________________.
A. only changes in prices
B. only changes in the amount being produced
C. only changes in the total expenditures but not total income
D. both changes in prices and changes in the amount being produced
E. neither changes in prices nor changes in the amount being produced
31. Which of the following is correct?
A. Nominal GDP is always less than real GDP.
B. Nominal GDP is always greater than real GDP in the base year.
C. Nominal GDP equals real GDP in the base year.
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D. Nominal GDP equals real GDP in all years but the base year.
E. None of the above.
32. When economists talk about growth in the economy, they measure economic growth as
A. the absolute change in nominal GDP from one period to another
B. the percentage change in nominal GDP from one period to another
C. the absolute change in real GDP from one period to another
D. the percentage change in real GDP from one period to another
E. the percentage change in GDP deflator
33. Suppose the government abolishes all environmental regulations and as a result, the
production of goods and services increased. But there is considerably more pollution. Based
on this scenario, which of the following statements is correct?
A. GDP would definitely increase, despite the fact that GDP includes environmental quality.
B. GDP would definitely decrease because GDP includes environmental quality.
C. GDP would definitely increase because GDP excludes environmental quality.
D. GDP could either increase or decrease because GDP excludes environmental quality.
E. GDP is not affected but environmental quality deteriorates.
34. The conventional way of calculating gross domestic product (GDP) tends to underestimate
the total economic well-being because it __________________________________.
A. includes the value of do-it-yourself projects
B. values $100 bullets more than it values $100 of diapers
C. includes the value of a parent who drops out of the labour force to care for children
D. excludes the value of leisure time and volunteerism
E. includes the value of healthcare costs due to excessive tobacco use

35. Assuming country A had a nominal GDP of $600 billion, a GDP deflator of 150 and a
population of 40 million. Country B had a nominal GDP of $720 billion, a GDP deflator of
120 and a population of 50 million. From this data, which country is likely to have had the
higher standard of living?
A. Country A because it has the higher nominal GDP per person.
B. Country B because it has the higher nominal GDP per person.
C. Country A because it has the higher real GDP per person.
D. Country B because it has the higher real GDP per person.

E. Cannot be determined exactly.

Answer ALL Short Answer Questions.

1. Which contributes more to GDP the production of a pound of hamburgers or the production
of a luxury car? Why?
2. Is GDP an under- or over estimate of output? Explain.
3. Which GDP is larger nominal GDP or real GDP? Explain.
4. Does real GDP increase if the amount of final goods and services produced decreased?
Explain.
5. Could nominal GDP increase if the quantity of final goods and services produced decreased?
Explain.
6. Why do economists use real GDP rather than nominal GDP to gauge economic well-being?
7. Why is it desirable for a country to have a large GDP? Give two reasons that GDP is not a
perfect indicator of economic well-being.
8. A friend tells you that the GDP of China is three times the GDP of Sweden. Does this imply

that China is better-off economically than Sweden? Why or why not?