Chapter 7 GDP: Measuring Total Production and...

Chapter 7 GDP: Measuring Total Production and Income 7.1 Gross Domestic Product Measures Total Production

1.

In 2007, American Airlines experienced an increase in the demand for its services and this fueled rising profits. These events were caused by

A)

an economic recession. B)

an economic expansion. C)

improved quality of service. D)

an aggressive marketing campaign. Answer:

B Diff: 2

Type: MC

Page Ref: 633/213 Topic:

Measuring Total Production Skill:

Factual Objective:

LO1: Explain how total production is measured AACSB Coding:

Reflective Thinking Special Feature:

Chapter Opener: Increases in GDP Help Revive American Airlines

2.

During a business cycle expansion, total production ________ and total employment ___________.

59

Chapter 7: GDP: Measuring Total Production and Income

A)

increases; increases B)

decreases; increases C)

decreases; decreases D)

increases; decreases Answer:

A Diff: 1

Type: MC


Business Cycle Skill:

Factual Objective:



None

3.

Macroeconomics, as opposed to microeconomics, includes the study of what determines the level of A)

output of a specific firm. B)

employment in a specific industry. C)

60


output of a specific industry. D)

employment in the economy. Answer:

D Diff: 1

Type: MC


Macroeconomics vs. Microeconomics Skill:

Factual Objective:



None

4.

Macroeconomics, as opposed to microeconomics, includes the study of what determines the A)

average prices of goods and services in the economy. B)

quantity of Dell employees. C)

price charged for laptop computers by Dell. D)

wages paid to employees by Dell. Answer:

61


A Diff: 1

Type: MC



Factual Objective:



None

5.

Macroeconomics seeks to understand A)

economic growth, business cycles, and inflation. B)

product demand, product cost, and profit maximization. C)

industry sales, marketing strategies and corporate growth. D)

public choices, private choices, and consumer maximization. Answer:

A Diff: 1

Type: MC


Macroeconomics vs. Microeconomics

62


Skill:

Factual Objective:



None

6.

Which of the following headlines would be more closely related to what macroeconomists study than what microeconomists study?

A)

Airlines raise ticket prices in response to rising fuel costs. B)

The United Auto Workers sign a contract raising wages and benefits 7% over the next 3 years. C)

Avocado prices rise due to a late frost in California. D)

Real GDP grows by 2.3% in the second quarter. Answer:

D Diff: 1

Type: MC



Conceptual Objective:


Reflective Thinking

63


Special Feature:

None

7.

In calculating gross domestic product, the Bureau of Economic Analysis uses the sum of the market value of final goods and services produced. This means that the BEA

A)

values goods and services at their market prices, multiplies them by the quantity produced, and then adds them up. B)

values goods at their market prices, multiplies them by the quantity produced, and then adds them up. C)

simply counts the total number of goods produced in the market place and then adds them up. D)

simply counts the total number of goods and services produced in the marketplace and then adds them up. Answer:

A Diff: 1

Type: MC



Factual Objective:

64




None

8.

Suppose you purchased in 2006 a house built in 2000. Which of the following would be included in gross domestic product for 2006?

A)

the value of the house in 2006 minus depreciation B)

the value of the house in 2006 C)

the value of the services of the real estate agent D)

the value of the house in 2000 Answer:

C Diff: 2

Type: MC






None

9.

65


Gross Domestic Product is calculated by summing up A)

the total quantity of goods and services in the economy. B)

the total market value of goods and services in the economy. C)

the total market value of final goods and services produced in the economy during a period of time. D)

the total quantity of goods and services produced in the economy during a period of time. Answer:

C Diff: 2

Type: MC



Definition Objective:



None

10.

Which of the following goods is directly counted in GDP? A)

the lettuce that Subway purchases for its sandwiches B)

66


a 12 inch Subway sandwich purchased by a student C)

the bread that Subway purchases for its sandwiches D)

the plastic bags that Subway purchases to wrap its sandwiches Answer:

B Diff: 2

Type: MC


Final vs. intermediate good Skill:




None

11.

Which of the following transactions represents the purchase of a final good? A)

The purchase of coffee beans by Starbucks. B)

Your father buys a new John Deere riding lawn mower. C)

Apple computer buys computer processors from Intel. D)

Delta buys a new European-made jetliner. Answer:

67


B Diff: 2

Type: MC


Final vs. intermediate good Skill:




None

12.

Which of the following is not directly counted in GDP? A)

consumer goods B)

government purchases C)

investment expenditures D)

intermediate goods Answer:

D Diff: 1

Type: MC


Final vs. intermediate good

68


Skill:

Factual Objective:



None

13.

Value added equals the market price of the firm's product minus A)

the price of intermediate goods. B)

wages and salaries. C)

depreciation on plant and equipment. D)

the price of all factors of production. Answer:

69


A Diff: 1

Type: MC


Measuring GDP by the Value Added Method Skill:



Analytic Skills Special Feature:

None

14.

Which of the following would be directly counted in GDP in 2007? A)

kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a farm house built in 1950 B)

kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a brand new country-style home. C)

kitchen cabinets purchased from Home Depot in 2007 to be installed in a house built in 1997 D)

None of the above Answer:

C Diff: 2

Type: MC


Measuring Total Production

70


Skill:




None

15.

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Table 7-1

Product Quantity PriceSweat Shirts 50 $30.00Dental Examinations 40 50.00Coffee Drinks 1,000 3. 00Coffee Beans 2,000 0.50

Refer to Table 7-1. Suppose that a simple economy produces only four goods and services: sweat shirts, dental examinations, coffee drinks, and coffee beans. Assume all of the coffee beans are used in the production of the coffee drinks. Using the information in the above table, nominal GDP for this simple economy equals

A)

$6,500. B)

3,090 units. C)

$7,500. D)

$4,500. Answer:

A Diff: 2

Type: MC



Analytical Objective:



Solved Problem: Calculating GDP

16.

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Table 7-2Product Quantity Price

Shoes 40 $50.00DVD's 100 25.00Tomatoes 2,000 1.00Ketchup 300 5.00

Refer to Table 7-2. Suppose that a simple economy produces only four goods and services: shoes, DVDs, tomatoes, and catsup. Assume one half of the tomatoes are used in making the catsup and the other half of the tomatoes are purchased by households. Using the information in the above table, nominal GDP for this simple economy equals

A)

$8,000. B)

$7,000. C)

2,440 units. D)

$6,000. Answer:

B Diff: 2

Type: MC






Solved Problem: Calculating GDP 17.

In the circular flow model, the value of total income for an economy ________ the value of total production. A)

73


may be greater than or less than B)

is less than C)

equals D)

is greater than Answer:

C Diff: 1

Type: MC

Page Ref: 636-7/216-7 Topic:

Production, Income, and the Circular Flow Skill:

Factual Objective:



None

18.

In the circular flow model, the value of total production for an economy ________ the value of total expenditures on final goods and services.

A)

equals B)

is greater than C)

may be greater than or less than

74


D)

is less than Answer:

A Diff: 1

Type: MC



Factual Objective:



None

19.

The real GDP of the U.S. in 2006 was approximately $13 trillion. This means that A)

total spending in 2006 was around $13 trillion. B)

total income in 2006 was around $13 trillion. C)

the value of output in 2006 was around $13 trillion. D)

all of the above are true. Answer:

D Diff: 2

Type: MC

75







None

20.

Which of the following is not an example of a transfer payment? A)

unemployment insurance payments B)

social security payments to retirees C)

health insurance payments to an army private D)

social security payments to disabled persons

76


Answer:

C Diff: 1

Type: MC



Factual Objective:



None

21.

The purchase of a new automobile is included in A)

consumption expenditures on services. B)

consumption expenditures on durable goods. C)

consumption expenditures on nondurable goods D)

investment expenditures. Answer:

B Diff: 1

Type: MC


77


Components of GDP Skill:

Factual Objective:



None

22.

Which of the following is not a durable good? A)

furniture B)

clothing C)

refrigerator D)

automobile Answer:

A Diff: 1

Type: MC





Reflective Thinking

78


Special Feature:

None

23.

The factors of production include A)

capital. B)

investment. C)

wages. D)

transfers. Answer:

A Diff: 1

Type: MC


79






None

24.

Investment, as defined by economists, would include the purchase of a A)

government bond. B)

share of stock in ExxonMobil. C)

computer by an accounting firm. D)

corporate bond. Answer:

C Diff: 1

Type: MC





Reflective Thinking

80


Special Feature:

None

25.

An example of business fixed investment spending is A)

$200 million of unsold cars at a car dealership. B)

a purchase of a bond by General Electric Corporation. C)

a purchase of a home by a household. D)

a purchase of a computer by an accounting firm. Answer:

D Diff: 1

Type: MC






None

81


26.

To calculate GDP by the expenditure method one must add A)

consumption spending, investment spending, government spending and net exports. B)

consumption spending, investment spending, government spending and exports. C)

labor, natural resources, entrepreneurship, and capital. D)

wages, rents, interest, and profits. Answer:

A Diff: 1

Type: MC






None

27.

82


Investment, as defined by economists, would not include which of the following? General Motors A)

adds 1000 new cars to inventories. B)

builds another assembly plant in the U.S. C)

buys U.S. government bonds. D)

buys a new robotic machine (from a plant in Ohio) to assemble cars. Answer:

C Diff: 1

Type: MC






Don't Let This Happen to YOU!: Remember What Economists Mean by Investment

28.

The purchase of a new house is included in A)

investment expenditures. B)

consumption expenditures. C)

83


government purchases. D)

net exports. Answer:

A Diff: 1

Type: MC



Factual Objective:



None

29.

The purchase by a Chinese household of a CD produced in the United States is included in U.S. A)

consumption expenditures. B)

government purchases.

84


C)

net exports. D)

investment expenditures. Answer:

C Diff: 1

Type: MC






None

30.

The purchase by a foreign government of an airplane produced in the United States is included in U.S. A)

government purchases. B)

investment expenditures. C)

net exports. D)

consumption expenditures. Answer:

85


C Diff: 1

Type: MC






None

31.

In 2007, Kendall Ford, an automobile dealership, spends $20,000 on a new car lift for its repair shop, $2,000 on a new copy machine for its sales division, and $500,000 on Ford Motor company stock. Unsold cars and trucks were valued at $900,000 on January 1, 2007 and unsold cars and trucks were valued at $600,000 on December 31, 2007. What is Kendall Ford’s total investment spending in 2007?

A)

$322,000 B)

$522,000 C)

$922,000 D)

$22,000 Answer:

A Diff: 3

Type: MC


86






Don't Let This Happen to YOU!: Remember What Economists Mean by Investment

32.

In 2006, which component of GDP had a negative value? A)

government spending B)

investment C)

net exports D)

consumption Answer:

C Diff: 1

Type: MC



87


Factual Objective:



None

33.

What is the largest component of spending in the U.S? A)

investment spending B)

government spending C)

consumption spending D)

net investment spending Answer:

C Diff: 1

Type: MC



Factual Objective:



None

88


34.

Table 7-3

Consumption expenditures $800Investment expenditures 200Government purchases 300Exports 100Imports 200Wages 800

Refer to Table 7-3. Consider the data above (in billions of dollars) for an economy: Gross domestic product (in billions of dollars) for this economy equals

A)

$1,200. B)

$1,400. C)

$2,200. D)

$1,600. Answer:

A Diff: 2

Type: MC






None

89


35.

Table 7-4

Consumption expenditures $800Investment expenditures 300Government purchases 300Government transfer payments 400Exports 300Imports 100

Refer to Table 7-4. Consider the data above (in billions of dollars) for an economy: Gross domestic product (in billions of dollars) for this economy equals

A)

$1,700. B)

$1,400. C)

$2,100. D)

$2,200. Answer:

A Diff: 2

Type: MC






None

90


36.

Which of the following is not true about the composition of GDP in 2006? A)

Business fixed investment is the largest component of investment. B)

The majority of consumer spending is on durable goods. C)

Purchases made by state and local governments are greater than purchases made by the federal government. D)

Imports are greater than exports. Answer:

B Diff: 2

Type: MC



Factual Objective:



None

91


37.

The sum of the value added of every firm involved in producing all final goods and services ________ gross domestic product.

A)

equals B)

is less than C)

is greater than D)

is sometimes greater than and other times less than Answer:

A Diff: 1

Type: MC



Factual Objective:



None

Table 7-5

Stage of Production Seller Buyer

Price(Dollars)

1 Steel Mill Auto Manufacturer $10,000

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2 Auto Manufacturer Auto Dealer 18,0003 Auto Dealer Consumer 25,000

Consider the table above showing three stages of production of an automobile.

38.

Refer to Table 7-5. The value added by the automobile dealer equals A)

$7,000. B)

$18,000. C)

$25,000. D)

$15,000. Answer:

A Diff: 2

Type: MC






None

93


39.

Refer to Table 7-5. The value of each automobile in gross domestic product equals A)

$25,000. B)

$15,000. C)

$18,000. D)

$7,000. Answer:

A Diff: 2

Type: MC





94



None

Scenario 7-1

CANOES-R-US makes canoes. It buys the shell of the canoe from another firm for $300 and uses its labor and intermediate goods to make the canoe. It sells the finished canoe to a retail canoe store for $800. The retail canoe store then sells the canoe to a consumer for $1,200.

40.

Refer to Scenario 7-1. The value added of CANOES-R-US for each canoe equals A)

$400. B)

$800. C)

$500. D)

$1,200. Answer:

C Diff: 2

Type: MC






None

95


41.

Refer to Scenario 7-1. The value of each canoe in gross domestic product equals A)

$400. B)

$800. C)

$1,200. D)

$500. Answer:

C Diff: 2

Type: MC






None

42.

96


In the circular flow of income, the value of all the income in the economy is greater than the value of goods and services produced in the economy.

Answer:

True

False Diff: 1

Type: TF






None

43.

Residential investment includes spending by firms on office buildings. Answer:

True

False Diff: 1

Type: TF




LO1: Explain how total production is measured

97


AACSB Coding:


None

44.

High-income countries such as the United States spend a greater amount on services as compared to goods. Answer:

True

False Diff: 1

Type: TF






None

45.

Why do we not count the value of intermediate goods and services in gross domestic product? Does the value of intermediate goods and services show up in gross domestic product? If so, how?

Answer:

We would double count if we counted directly the value of intermediate goods and services, because their value shows up in the value of the final goods and services in which they are a part.

Diff: 2

Type: SA


98






None

46.

People complain that inflation increases the cost of the goods and services and therefore reduces their purchasing power. If inflation and income grow at the same rate, is this complaint valid? Explain carefully.

Answer:

If inflation and income grow at the same rate, real income will be constant as inflation increases both total expenditures and total income by the same amount. All of the money that a business receives on the sale of its product must be paid out as income to the owners of the factors of production. If the prices of final goods and services increase (inflation), then there is more money for the businesses to pay out as income. Therefore, on average the buying power of income will remain constant. The complaint is not valid.

Diff: 3

Type: SA




99




None

47.

Table 7-6

Product Quantity PriceiPods 20 $250.00T-shirt 100 20.00Bottled Water 2,000 1.00Oranges 600 0.50

Refer to Table 7-6. Suppose that a simple economy produces only four goods and services: iPods, tee-shirts, bottled water, and oranges. Calculate nominal GDP for this simple economy.

Answer:

Nominal GDP equals (20 x $250) + (100 x $20) + (2,000 x $1) + (600 x $0.50) = $9,300. Diff: 2

Type: SA







100


48.

Table 7-7

Product Quantity PriceiPods 50 $40.00T-shirt 150 15.00Bottled Water 600 1.00Oranges 800 0.75

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

Answer:

Nominal GDP equals (50 x $40) + (150 x $15) + ((600 x .5) x $1)) + (800 x 0.75) = $5,150. Diff: 3

Type: SA







49.

If the value added of a firm is positive, will the firm necessarily have positive profits? Answer:

No. Value added equals the price of the firm's product minus the cost of intermediate goods. The intermediate goods are converted to the firm's profits by the application of such resources as labor, capital, and entrepreneurship. Profit is the difference between the total sales revenue and the opportunity cost of all the resources used to make the product.

Diff: 3

101


Type: SA






None

50.

How can a firm have a negative valued added, as supposedly some state-owned businesses did in the former Soviet Union? What has to be true for value added to be negative?

Answer:

A negative value added means that the cost of the intermediate goods exceeds the price of the final product

102


produced using the intermediate goods. For value added to be negative, a firm would use its primary factors of production, such as labor and capital equipment, to produce a product from the intermediate goods that is less valuable than the intermediate goods themselves.

Diff: 3

Type: SA






None

7.2 Does GDP Measure What We Want It to Measure?

1.

The Philippines and Vietnam have roughly the same size population. Suppose the GDP of the Philippines is $1,000 billion and the GDP of Vietnam is $10,000 billion. You should conclude

A)

it is not possible to make a good comparison of the economic well being of a typical individual in the 2 countries without additional information.

B)

a typical person in Vietnam is less than 10 times as well off as the typical person in the Philippines. C)

a typical person in Vietnam is 10 times as well off as the typical person in the Philippines. D)

a typical person in Vietnam is more than 10 times as well off as the typical person in the Philippines. Answer:

A Diff: 2

Type: MC

103



Shortcomings in GDP as a Measure of Total Production Skill:


LO2: Discuss whether GDP is a good measure of well-being AACSB Coding:


Economics in YOUR Life!: What's the Best Country for You to Work In?

2.

Gross domestic product understates the total production of final goods and services because of the omission of A)

intermediate goods. B)

inflation. C)

104


exports. D)

nonmarket household production. Answer:

D Diff: 1

Type: MC






None

3.

Gross domestic product understates the total production of final goods and services because of the omission of A)

exports. B)

intermediate goods. C)

the underground economy. D)

inflation. Answer:

C Diff: 1

105


Type: MC






None

4.

The size of the underground economy would tend to decrease if the government of a country A)

made over-the-counter drugs illegal. B)

decreased government regulations on businesses. C)

increased income tax rates. D)

increased business taxes. Answer:

B Diff: 2

Type: MC


The underground economy Skill:

Conceptual

106


Objective:



None

5.

The size of the underground economy would tend to increase if the government of a country A)

increased income tax rates. B)

legalized prostitution. C)

decreased government regulations on businesses. D)

legalized drugs. Answer:

A Diff: 2

Type: MC


107






None

6.

Suppose Bob works for Mary as a proofreader. Mary and Bob fall deeply in love, marry and have eight children. Bob stops working for Mary in order to care for the children. What will be the effect on GDP?

A)

GDP will not change. B)

GDP will increase. C)

GDP will decrease. D)

GDP may increase or may decrease depending on inflation. Answer:

C Diff: 2

Type: MC





108



None

7.

Which of the following statements about the underground economy is true? A)

The underground economy in developing countries amounts to less than 10% of measured GDP. B)

Omitting underground economy production from measured GDP causes errors in GDP growth estimates in the long run.

C)

Income that is earned but not reported as income for tax purposes is included in the calculation of GDP. D)

Most transactions that occur in the underground economy are included in the calculation of GDP. Answer:

B Diff: 2

Type: MC






None

8.

109


The informal sector can be a significant drag on the economies of developing countries because the firms in the informal sector

A)

employ illegal immigrants from other countries. B)

sell their goods and services to citizens in other countries. C)

tend to be smaller and have less capital than firms acting legally. D)

produce goods and services no one wants. Answer:

C Diff: 1

Type: MC



Factual Objective:



Making the Connection: How the Underground Economy Hurts Developing Countries

9.

Legalizing all forms of illegal activities A)

reduces GDP and the size of the underground economy. B)

increases GDP and increases the size of the underground economy.

110


C)

increases GDP and reduces the size of the underground economy. D)

reduces GDP and increases the size of the underground economy. Answer:

C Diff: 2

Type: MC






None

10.

Which of the following statements is true? A)

GDP accounting rules do not adjust for production that pollutes the economy. B)

Household production is counted in GDP as it amounts to real production. C)

A decrease in the crime rate increases GDP as people will spend more on security. D)

GDP growth distributes income equally to people in the economy. Answer:

111


A Diff: 2

Type: MC



Factual Objective:



None

11.

Which of the following is likely to increase measured GDP? A)

Tax rates increase and more people attempt to underreport their income for tax purposes. B)

A greater number of women decide to stay at home and provide day care for their children under age 5. C)

Marijuana becomes legal to grow and sell. D)

112


The do-it-yourself craze becomes increasingly popular and more people decide to improve their own homes. Answer:

C Diff: 2

Type: MC






None

12.

The U.S. work week has declined from 60 hours in 1890 to 40 hours today. The impact of the decline in working hours

A)

decreases U.S. GDP and decreases the well-being of a typical working person in the U.S. B)

increases U.S. GDP and increases the well-being of a typical working person in the U.S. C)

decreases U.S. GDP and increases the well-being of a typical working person in the U.S. D)

increases U.S. GDP and decreases the well-being of a typical working person in the U.S. Answer:

C Diff: 2

Type: MC

Page Ref: 644/224

113


Topic:





None

13.

A sharp increase in the divorce rate increases the number of lawyers hired to determine divorce settlements. This will

A)

increase GDP and decrease well being in the economy. B)

decrease GDP and decrease well being in the economy. C)

decrease GDP and increase well being in the economy. D)

increase GDP and increase well being in the economy. Answer:

A Diff: 1

Type: MC




114




None

14.

Which of the following is not a true statement about the impact of World War II on the U.S. economy? A)

Increased production of tanks, ships, planes, and munitions accounted for most of the increase in GDP. B)

More than 40% of the labor force was in the military or producing war goods. C)

U.S. GDP increased dramatically from 1941 to 1945. D)

The war time years were a period of prosperity for U.S. consumers. Answer:

D Diff: 2

Type: MC






Making the Connection: Did World War II Bring Prosperity?

115


15.

Increases in real GDP would overstate the increase in the well-being of a country over time if, over that time period, the

A)

amount of pollution decreased. B)

price level increased. C)

crime rate decreased. D)

average hours worked per week increased. Answer:

D Diff: 2

Type: MC






None

16.

Increases in real GDP would understate the well-being of a country over time if, over that time period, the A)

average hours worked per week decreased. B)

116


divorced rate increased. C)

amount of pollution decreased. D)

crime rate increased. Answer:

C Diff: 2

Type: MC


GDP as a measure of well-being Skill:




None

17.

Statistics on real GDP during World War II may give a misleading indication of whether World War II was a period of prosperity because

A)

government agencies were shorthanded and did a particularly poor job of collecting data.

117


B)

most of the increased production was for military goods, not consumption goods. C)

inflation may have been considerably higher than estimated. D)

government agents purposely inflated the production numbers to maintain American support for the war. Answer:

B Diff: 1

Type: MC



Factual Objective:



Making the Connection: Did World War II Bring Prosperity?

18.

Developing countries with large informal sectors tend to have firms that invest less in capital equipment. Answer:

True

False Diff: 2

Type: TF


118






Making the Connection: How the Underground Economy Hurts Developing Countries

19.

If income is unequally distributed in an economy, increases in GDP may not raise well-being in an economy. Answer:

True

False Diff: 1

Type: TF






None

20.

Real GDP per capita is calculated by dividing the value of real GDP for a country by the country's adult population. Answer:

True

False

119


Diff: 1

Type: TF






None

21.

The underground economy the informal sector can be a significant drag on the economies of developing countries. Why are firms in the informal sector often less efficient than firms in the formal sector?

Answer:

Entrepreneurs of the firms in the informal sector limit their investments in capital equipment because they are afraid that the firms will someday be shut down. The workers in the firms, consequently, have less capital equipment to work with.

Diff: 2

Type: SA






120


None

22.

Over the last 50 years, has the ratio of household production to gross domestic product in the United States increased or decreased? Consider the effect of the increased number of women working outside the home, and the effect of advances in technology in household production such as microwaves, coffee makers, power tools, etc.

Answer:

"Household production'" refers to goods and services people produce for themselves. It is not clear whether the ratio of household production to gross domestic product has increased or decreased. More women working outside the home has decreased the ratio of household production to GDP, but the technological advances at home have allowed people to produce more household production in less time.

Diff: 3

Type: SA






None

7.3 Real GDP versus Nominal GDP

1.

Nominal GDP is GDP in a given year A)

valued in the prices of that year. B)

adjusted for inflation. C)

adjusted for anticipated inflation. D)

121


valued in the prices of the base year. Answer:

A Diff: 1

Type: MC


Real GDP versus Nominal GDP Skill:


LO3: Discuss the difference between real GDP and nominal GDP AACSB Coding:


None

2.

Real GDP is GDP in a given year A)

adjusted for anticipated inflation. B)

valued in the prices of that year. C)

adjusted for unanticipated inflation. D)

valued in the prices of the base year. Answer:

D Diff: 1

122


Type: MC






None

Table 7-8

Year Guns ProducedPrice of Guns

(Dollars) Butter ProducedPrice of Butter

(Dollars)2000 80 $5 40 $42006 90 $6 60 $10

Consider the data above for a fictional economy that produces only two products: guns and butter.

3.

Refer to Table 7-8. Real GDP for this fictional economy for 2006 using 2000 as the base year equals A)

$560. B)

$880. C)

$1,140. D)

$690. Answer:

D Diff: 2

Type: MC

123







Solved Problem: Calculating Real GDP

4.

Refer to Table 7-8. Nominal GDP for this fictional economy in 2006 equals A)

$880. B)

$690. C)

$1,140. D)

$560. Answer:

C Diff: 2

Type: MC




124




None

5.

Table 7-9

Year Nominal GDP Real GDP1995 $7,400 $7,5371996 $7,813 $7,8131997 $8,301 $8,1651998 $8,760 $8,516

Refer to Table 7-9. Consider the data above on nominal GDP and real GDP (values are in billions of dollars): The base year used in calculating real GDP is

A)

1996. B)

1998. C)

1997. D)

1995. Answer:

A Diff: 2

Type: MC




LO3: Discuss the difference between real GDP and nominal GDP

125


AACSB Coding:


None

Table 7-10

YearOranges Produced

Price of Oranges(Dollars) Shirts Produced

Price of Shirts(Dollars)

1998 1,800 $0.90 110 $302000 2,000 $1.00 110 $35

Consider the data above for a fictional economy that produces only two products: oranges and shirts.

6.

Refer to Table 7-10. Real GDP for this fictional economy for 1998 using 2000 as the base year equals A)

$5,300. B)

$4,620. C)

$5,100. D)

$5,850. Answer:

A Diff: 2

Type: MC





126



None

7.

Refer to Table 7-10. Nominal GDP for this fictional economy for 1998 equals A)

$5,850. B)

$5,300. C)

$4,620. D)

$5,100. Answer:

C Diff: 2

Type: MC






None

8.

If the quantity of goods and services produced in the economy decreases A)

127


it may be possible for real GDP to increase. B)

nominal GDP would certainly increase. C)

it may be possible for nominal GDP to increase. D)

real GDP would certainly increase. Answer:

C Diff: 2

Type: MC






None

9.

Suppose that nominal GDP in 2005 was less than real GDP in 2005. Given this information, we know for certain that

A)

real GDP in 2005 was less than real GDP in the base year. B)

real GDP in 2005 was greater than real GDP in the base year. C)

the price level in 2005 was less than the price level in the base year.

128


D)

the price level in 2005 was greater than the price level in the base year. Answer:

C Diff: 2

Type: MC






None

10.

Which of the following could cause nominal GDP to decrease, but real GDP to increase? A)

The price level rises and the quantity of final goods and services produced falls.

129


B)

The price level falls and the quantity of final goods and services produced falls. C)

The price level rises and the quantity of final goods and services produced rises. D)

The price level falls and the quantity of final goods and services produced rises. Answer:

D Diff: 3

Type: MC






None

11.

Which of the following could cause nominal GDP to increase, but real GDP to decrease? A)

The price level rises and the quantity of final goods and services produced falls. B)

The price level rises and the quantity of final goods and services produced rises. C)

The price level falls and the quantity of final goods and services produced falls. D)

130


The price level falls and the quantity of final goods and services produced rises. Answer:

A Diff: 3

Type: MC






None

12.

If real GDP in 2007 (using 2002 prices) is lower than nominal GDP of 2006, then A)

prices in 2007 are lower than prices in 2006. B)

real GDP in 2007 is larger than real GDP in 2006. C)

nominal GDP in 2007 equals nominal GDP in 2006. D)

prices in 2007 are higher than prices in 2006. Answer:

A Diff: 1

Type: MC


131






None

13.

To examine how the total production of an economy has changed over time, it would be better to examine A)

GDP at current prices. B)

the GDP deflator. C)

nominal GDP. D)

real GDP. Answer:

D Diff: 2

Type: MC




132




None

14.

If prices in the economy rise, then A)

the purchasing power of a dollar stays constant. B)

the purchasing power of a dollar declines C)

the purchasing power of a dollar cannot be determined. D)

the purchasing power of a dollar rises. Answer:

B Diff: 2

Type: MC






None

15.

133


Real GDP will increase A)

only if the quantity of final goods and services produced rises. B)

if either the price level rises or the quantity of final goods and services produced rises. C)

only if the price level falls. D)

only if the price level rises. Answer:

A Diff: 3

Type: MC






None

16.

134


If nominal GDP is $5 trillion and real GDP is $4 trillion, the GDP deflator is A)

80. B)

125. C)

12.5. D)

800. Answer:

B Diff: 2

Type: MC


GDP deflator Skill:




None

17.

The GDP deflator is the A)

ratio of nominal GDP to real GDP multiplied by 100. B)

ratio of real GDP to nominal GDP multiplied by 100. C)

135


difference between real GDP and nominal GDP multiplied by 100 D)

difference between nominal GDP and real GDP multiplied by 100 Answer:

A Diff: 1

Type: MC


GDP deflator Skill:




None

18.

Nominal GDP will increase A)

if either the price level or the quantity of goods and services produced rises. B)

only if the price level rises. C)

only if the quantity of final goods and services produced rises. D)

only if the price level falls. Answer:

A Diff: 3

136


Type: MC






None

19.

The GDP deflator is a measure of the A)

average level of prices of intermediate goods and services in the economy. B)

total production of the economy adjusted for inflation. C)

137


average level of prices of final goods and services in the economy. D)

total production of the economy unadjusted for inflation. Answer:

C Diff: 1

Type: MC


GDP deflator Skill:

Factual Objective:



None

20.

If nominal GDP exceeds real GDP for a specific year, then the GDP deflator must be A)

equal to 100. B)

less than 0. C)

greater than 100. D)

less than 100. Answer:

C Diff: 2

138


Type: MC


GDP deflator Skill:




None

21.

The GDP deflator in year 2 is 105, using year 1 as the base year. This means that, on average, the cost of goods and services is

A)

105% higher in year 2 than in year 1. B)

105% higher in year 1 than in year 2. C)

5% higher in year 1 than in year 2. D)

5% higher in year 2 than in year 1. Answer:

D Diff: 2

Type: MC



139





None

22.

If the GDP deflator is less than 100, then for that year nominal GDP ________ real GDP. A)

is less than B)

is greater than C)

may be greater than or less than D)

equals Answer:

A Diff: 2

Type: MC

140



GDP deflator Skill:




None

23.

Table 7-11

Year Nominal GDP Real GDP1998 $8,782 $8,5091999 $9,274 $8,859

Refer to Table 7-11. Consider the data above on nominal GDP and real GDP (values are in billions of dollars): The GDP deflator for 1999 equals

A)

104.7. B)

105.6. C)

104.1. D)

95.5. Answer:

A Diff: 2

Type: MC


141


GDP deflator Skill:




None

24.

Table 7-12

Year Nominal GDP Real GDP1997 $8,318 $8,1591998 $8,790 $8,5161999 $9,299 $8,876

142


Refer to Table 7-12. Consider the data above on nominal GDP and real GDP (values are in billions of dollars): The GDP deflator for 1998 equals

A)

103.2. B)

104.2. C)

96.9. D)

105.7. Answer:

A Diff: 2

Type: MC


GDP deflator Skill:




None

25.

If prices rise on average in the U.S. economy, the purchasing power of a dollar declines. Answer:

True

False Diff: 1

143


Type: TF






None

26.

Using "chain-weighted" prices to calculate real GDP remedies the distortions causes by changed in relative prices over time.

Answer:

True

False Diff: 1

Type: TF






None

144


27.

In the term "real GDP," what does "GDP" stand for and what does it measure? What does "real" indicate? Answer:

GDP stands for gross domestic product and measures the value of the total production of final goods and services. "Real" indicates that the goods and services produced are valued using the prices of the base year, not the current year, and therefore are adjusted for inflation.

Diff: 2

Type: SA






None

28.

Is nominal GDP measured in terms of quantity or in terms of dollars? If dollars, the value of the dollar from what period? Is real GDP measured in terms of quantity or in terms of dollars? If dollars, the value of the dollar from what period?

Answer:

Both nominal GDP and real GDP are measured in terms of dollars. Nominal GDP is measured using the value of the dollar for that specific year, and real GDP is measured using the value of the dollar for the base year.

Diff: 2

145


Type: SA






None

29.

Japan experienced periods of deflation a declining price level during the 1990s. During a deflationary period, which would be higher: nominal GDP or real GDP? Why? Assume that the base year of choice is prior to the deflationary period.

Answer:

Real GDP would be higher, as long as the base year was before the period of deflation. Nominal GDP would be measured using the lower prices that resulted from the deflation. Real GDP would use the higher prices before the deflation, assuming the base year was before the deflation.

Diff: 3

Type: SA






None

146


30.

Since real GDP is adjusted for inflation and nominal GDP is not, nominal GDP must always be higher than real GDP. Do you agree or disagree? Why?

Answer:

Disagree. It depends on whether the year being examined is before or after the base year. If after the base year, then nominal GDP will always exceed real GDP if inflation has occurred. If before the base year, then nominal GDP will always be less than real GDP if inflation has occurred. If the year being examined is before the base year and inflation has occurred, then the base year prices will exceed the prices of that year.

Diff: 3

Type: SA






None

31.

Table 7-13

2000 2006Product Quantity Price Quantity Price

Hats 200 $20 250 $21French Fries 2,000 1 2,300 2Digital Cameras 40 200 50 18

147


Refer to Table 7-13. Consider the data above for a simple economy: Calculate nominal GDP and real GDP for 2006, using 2000 as the base year. Show your work.

Answer:

Nominal GDP for 2006 equals (250 x $21) + (2,300 x $2) + (50 x $180) = $18,850. Real GDP for 2006 equals (250 x $20) + (2,300 x $1) + (50 x $200) = $17,300.

Diff: 3

Type: SA







32.

148


Table 7-14

2000 2005 2006Product Quantity Price Quantity Price Quantity Price

MP3s 40 $250 45 $255 50 $250Tacos 2,000 2.00 2,200 2.25 2,300 2.40Coats 300 50 310 52 350 55

Refer to Table 7-14. Consider the data above for a simple economy: Using 2000 as the base year, calculate nominal GDP, real GDP, and the GDP deflator for 2006. Show your work.

Answer:

Nominal GDP for 2006 equals (50 x $250) + (2,300 x $2.40) + (350 x $55) = $37,270. Real GDP for 2006 equals (50 x $250) + (2,300 x $2.00) + (350 x $50) =$34,600.

The GDP deflator equals x 100 = 107.7 Diff: 3

Type: SA







33.

If the GDP deflator is less than 100, which will be higher: nominal GDP or real GDP? Why? Answer:

Real GDP will be higher. The GDP deflator is the ratio of nominal GDP to real GDP, so if the value is less than 100, nominal GDP must be smaller than real GDP.

Diff: 2

Type: SA


149


GDP deflator Skill:




None

34.

Business week reports there is a new serious problem in reporting real GDP accurately. This problem is related to increases in offshoring and the difficulties the Bureau of Labor statistics has in tracing the connected decline in import prices of these products. Firms receive huge cost savings by having goods such as furniture manufactured in other countries such as China. These firms close their U.S. factories, import the furniture or other goods from China or elsewhere, and domestic production declines and imports rise. However, the import price index gets miscalculated so that it grossly overstates prices of these imported goods. The BLS has no way of connecting the new, imported table with the table that used to be domestically manufactured. (Source: The Real Cost Of Offshoring U.S. data show that moving jobs overseas hasn't hurt the economy. Here's why those stats are wrong, Michael Mandel, Business Week, June 18, 2007. http://www.businessweek.com/magazine/content/07_25/b4039001.htm?chan=top+news_top+news+index_businessweek+exclusives)

150


How would overstating the import price index affect the calculation of real imported consumption goods? How would the miscalculation of real imported consumption goods affect the real consumption expenditure component of GDP and the estimate of real GDP?

Answer:

Overstating the import price index would cause one to underestimate the real value of imported consumption expenditures for a given nominal value of imported consumer expenditures. This is because the index is essentially the price deflator. The price deflator is too large, and since it is in the denominator of our real import consumption calculation, the estimate of the real value of imported consumer goods is therefore underestimated.

To calculate real domestic consumption expenditures, the Bureau of Commerce subtracts real imported consumption expenditures from real total consumption expenditures. Real imported consumption expenditures are underestimated, causing real domestic consumption expenditures and real GDP to be overestimated.

Diff: 3

Type: SA






None

7.4 Other Measures of Total Production and Total Income

1.

Gross national product, GNP, of the United States is the market value of all final goods and services A)

151


produced by residents of the United States anywhere in the world. B)

consumed within the United States. C)

produced within the United States. D)

consumed by residents of the United States anywhere in the world. Answer:

A Diff: 1

Type: MC


GDP vs. GNP Skill:


LO4: Become familiar with other measures of total production and total income AACSB Coding:


None

2.

The output of Mexican citizens who work in Texas would be included in the A)

gross domestic product of Mexico. B)

gross national product of Mexico. C)

net national product of the United States. D)

152


gross national product of the United States. Answer:

B Diff: 2

Type: MC


GDP vs. GNP Skill:




None

3.

The output of U.S. citizens who work in Canada would be included in the A)

gross domestic product of Canada. B)

gross domestic product of the United States. C)

gross national product of Canada. D)

gross national product of Canada and the gross national product of the United States. Answer:

A Diff: 2

Type: MC

Page Ref: 649/229

153


Topic:

GDP vs. GNP Skill:




None

4.

If an American firm opens a production facility in India, the total value of the production will be included in the A)

gross national income of India. B)

gross domestic product of the U.S. C)

gross domestic product of India. D)

net domestic product of the U.S. Answer:

C Diff: 2

Type: MC

154



GDP vs. GNP Skill:




None

5.

Which of the following is included in both the U.S. GDP and U.S. GNP? A)

the value of all cars produced by Toyota in the U.S. B)

the value of all cars produced by General Motors in the U.S. C)

the value of all cars produced by Nissan in Japan and the U.S. D)

the value of all cars produced by Ford in Mexico Answer:

B Diff: 2

Type: MC


GDP vs. GNP Skill:


155




None

6.

A country in which a significant fraction of domestic production takes place in foreign owned factories and facilities is most likely a country where

A)

GDP is much larger than GNP. B)

GDP is not comparable to GDP. C)

GDP is equal to GNP. D)

GNP is much larger than GDP. Answer:

A Diff: 2

Type: MC


GDP vs. GNP Skill:




None

156


7.

The value of what a U.S. owned McDonald's produces in South Korea is included in the U.S. ________ and the South Korean _________.

A)

GNP; GNP B)

GDP; GDP C)

GNP; GDP D)

GDP; GNP Answer:

C Diff: 2

Type: MC


GDP vs. GNP Skill:



157



None

8.

Net national product equals gross national product minus A)

depreciation. B)

changes in inventories. C)

imports. D)

inventories. Answer:

A Diff: 1

Type: MC


Other Measures of Total Production and Total Income Skill:




None

9.

National income equals net national product A)

158


plus government transfer payments. B)

plus sales taxes. C)

minus sales taxes. D)

minus government transfer payments. Answer:

C Diff: 1

Type: MC



Factual Objective:



None

10.

159


Depreciation is A)

the decline in the value of the stock market, net of dividends. B)

the value of the addition to the capital stock. C)

the value of the decrease in business inventory stocks. D)

the value of worn-out equipment, machinery, and buildings. Answer:

D Diff: 1

Type: MC






None

11.

Suppose that in 2002 the national income in the U.S. was $200 billion, depreciation was $10 billion, indirect business taxes were $15 billion, and transfer payments were $5 billion. Gross national product in 2002 is

A)

$215 billion. B)

$225 billion.

160


C)

$230 billion. D)

$180 billion. Answer:

B Diff: 2

Type: MC






None

12.

Indirect business taxes are A)

corporate income taxes. B)

sales taxes. C)

payroll taxes. D)

personal taxes. Answer:

161


B Diff: 1

Type: MC






None

13.

The best measure of the income households actually have available to spend is A)

national income. B)

personal income. C)

disposable personal income.

162


D)

net national income. Answer:

C Diff: 1

Type: MC



Factual Objective:



None

14.

Disposable personal income equals personal income A)

plus government transfer payments. B)

minus government transfer payments plus personal tax payments. C)

minus personal tax payments. D)

minus personal tax payments plus government transfer payments. Answer:

C Diff: 1

Type: MC

163







None

15.

The largest income component of GDP is A)

proprietor's income. B)

corporate profits. C)

compensation received by employees. D)

interest received by households. Answer:

C Diff: 1

Type: MC



Factual Objective:

164




None

Table 7-15

National Income $1000 billionRetained earnings not paid as dividends $50 billionTransfer payments $40 billionInterest on government bonds $20 billionPersonal Taxes $30 billion

The components of national income for an economy are represented in Table 7-15 above.

16.

Refer to Table 7-15. What is the level of personal income for this economy? A)

$1,010 billion B)

$990 billion C)

$860 billion D)

$1,140 billion Answer:

A Diff: 3

165


Type: MC






None

17.

Refer to Table 7-15. What is the level of personal disposable income for this economy? A)

$980 billion B)

$860 billion C)

$1,010 billion D)

$1,080 billion Answer:

A Diff: 3

Type: MC



Analytical

166


Objective:



None

18.

Which of the following is not a reason for the slowdown in the demand for ground-freight transportation in the U.S. economy in the last quarter of 2006?

A)

a decline in the demand for housing B)

a slowdown in the growth of goods portion of the U.S. economy C)

a decline in the demand for automobiles D)

demand for trucking has become more cyclical Answer:

167


D Diff: 2

Type: MC


Business Cycle Skill:

Factual Objective:



An Inside Look: Trucking Industry Depends on the Goods-Not Services-Component of GDP

19.

Transfer payments are subtracted from national income to get to personal income. Answer:

True

False Diff: 1

Type: TF






None

168


20.

For developed countries like the U.S., GDP will always exceed GNP. Answer:

True

False Diff: 1

Type: TF


GDP vs. GNP Skill:




None

169

Chapter 7 GDP: Measuring Total Production and...

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