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CHA PTER 4 MEASURING THE PERFORMANCE OF THE ECONOMY

Grading * straightforward questions & definitions ** challenging questions *** more challenging questions

MULTIPLE CHOICE QUESTIONS

1. Which of the following does not represent a key macroeconomic variable?


a. b. c. d. e. The unemployment rate The inflation rate Gross Domestic Product (GDP) Income distribution The population growth rate

(*)

2. If we were to add up the value of output of all firms in the economy, we would (**) a. obtain GDP at factor cost. b. obtain GDP at market prices. c. obtain GDP using the income method. d. overestimate the value of production taking place in the economy. e. underestimate the value of production taking place in the economy. Questions 3 and 4 are based on the table below, which describes the process by which a loaf of bread is made available to a consumer as a final good. Price (R) of a loaf of bread Farmer sells wheat to miller Miller sells flour to baker Baker sells bread to grocer Grocer sells bread to consumer 3. The total value of a loaf of bread is a. b. R1,55. R2,25. 0,70 1,05 1,90 2,25 (**)

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c. d. e.

R0,35. R5,90. R4,20. (*)

4. The value added by the grocer equals a. b. c. d. e. R2,25. R1,90. R1,05. R0,70. R0,35.

5. Net Domestic Product is equal to Gross Domestic Product net of a. b. c. d. e. inflation. indirect taxes. subsidies. net factor payments. depreciation/consumption of fixed capital.

(*)

6. If dairy farming is subsidised, we would expect the value of a litre of milk to be


(**) a. b. c. d. e. equal to the price paid by the consumer for a litre of milk. greater than the price paid by the consumer for a litre of milk. less than the price paid by the consumer for a litre of milk. lower because of the subsidy. higher because of the subsidy.

7. For a given year, Statistics South Africa found that nominal GDP calculated at market prices was different from nominal GDP calculated by the income method. Which of the following items would account for the difference? (*) a. b. c. d. e. Depreciation on capital equipment Inflation Interest on loans Indirect taxes and subsidies Net incomes from abroad

8. If 2000 is the base year for real GDP calculations, we know for certain that nominal GDP a. b. c. d. e. is less than real GDP in 2000. is greater than real GDP in 2000. equals real GDP in 2000. in 1999 will be greater than real GDP in 2000. in 1999 will be less than real GDP in 2000.
2

(**)

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9. GDP at ________ prices will be greater than GDP at ________ prices because of
________. a. b. c. d. e. constant; current; inflation current; constant; inflation constant; current; depreciation current; constant; depreciation current; constant; deflation (**) (**)

10. Since the R100 note was first introduced in South Africa, its value has a. decreased in nominal terms and increased in real terms. b. decreased in nominal terms and decreased in real terms. c. increased in nominal terms and decreased in real terms. d. increased in nominal terms and increased in real terms. e. decreased in real terms, although its nominal value has remained unchanged.

11. If South Africas GDP is greater than its GNI, then the income earned by foreign owners of companies and foreign workers in South Africa is ________ the income earned by South Africans who have invested, or who are working, abroad. (**) a. b. c. d. e. greater than added to subtracted from less than deflated by

12. To obtain GDP at market prices from Gross Domestic Expenditure, we must (**) a. subtract spending on exports and add spending on imports. b. subtract spending on imports and add spending on exports. c. subtract spending on intermediate goods and add spending on exports. d. subtract spending on exports and add spending on intermediate goods. e. subtract spending on net exports. The table below shows a section of the national accounts for a small country in 2000. Answer Questions 13 and 14 using the information provided in the table. Consumption expenditure Government expenditure Depreciation 10 500 3 000 500

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Exports Imports Gross Capital Formation (Investment) 13. The value of Gross Domestic Expenditure is a. b. c. d. e. 15 900. 15 200. 15 400. 18 400. 15 700.

1 200 1 000 2 200 (**)

14. The value of Net Domestic Product is a. b. c. d. e. 15 900. 15 700. 15 200. 15 400. 18 400.

(***)

15. In a country with a population of 50 million people, there are 20 million children under the age of 15 years, 16 million employed, 9 million pensioners, 4 million unemployed and 1 million people who are physically unable to work. The unemployment rate in this country equals (**) a. b. c. d. e. 8%. 10%. 13,3%. 20%. 25%. (*)

16. A consumers real purchasing power refers to a. b. c. buy. d. e. the nominal income level of the consumer. wage income earned through employment. the maximum volume of goods and services that the consumer can nominal GDP per capita. real GDP deflated by the price level.

17. The inflation rate is measured by a. b. c. the ratio of current year CPI to base year CPI. the percentage change in the CPI from one year to the next. the percentage change in GDP from one year to the next.

(**)

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d. e.

the ratio of current year CPI to the next years CPI. the ratio of current year PPI to the next years PPI.

Refer to the table below that contains information about the Consumer Price Index in Mythopia, in order to answer Questions 18, 19 and 20. The unit of currency in Mythopia is the Myth. Year 1998 1999 2000 Consumer Price Index 100,0 112,1 120,8 (**)

18. Between 1998 and 2000, the purchasing power of the consumers Myth a. b. c. d. e. decreased to 20,8 cents. decreased to 120,8 cents. decreased to 83 cents. decreased to 93 cents. increased to 120,8 cents.

19. The inflation rate in 2000 was

(**)

a.
b. c. d. e.

7,8%. 8,7%. 20,8%. 17,2%. 120,8%.

20. Suppose that the inflation rate in 2001, calculated using the CPI, was found to be 8%. What was the value of the CPI in 2001? (**) a. b. c. d. e. 128,8 130,5 129,7 132,0 124,0 (*)

21. The current account of the balance of payments records

a. all sales and purchases of goods and services as well as income flows to and from the rest of the world. b. the value of exports, but not imports. c. the change in the countrys gold and foreign exchange reserves. d. all purely financial flows in and out of the country. e. all of the above.

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22. If the financial (or capital) account is in surplus, then a. b. c. d. e. the value of imports exceeds the value of exports. the value of exports exceeds the value of imports. there will be a surplus on the overall balance of payments. capital outflows exceed capital inflows. there has been a net inflow of foreign capital into the country.

(**)

23. Which one of the following steps is required to construct a Lorenz curve?

(**)

a. Find the cumulative age of the population. b. Order the population from youngest to oldest. c. Order the population from poorest to richest. d. Divide the income of the richest group by the income of the poorest group. e. Divide the population into ten equal groups and calculate the average income of these groups. 24. Refer to the table below that describes the income distribution in a country. Population Poorest 20% Next 20% Next 20% Next 20% Richest 20% Cumulative Percentage Population 20 40 60 80 100 Income 5 10 25 60 100

In this country, the richest 40% of the population earn ________ of the total income; whilst the poorest 40% of the population earn ________ of the total income. (**) a. b. c. d. e. 40%; 15% 40%; 10% 60%; 15% 75%; 10% 75%; 15%

25. The area between the Lorenz curve of a country and the diagonal of perfect equality represents a. b. c. the area of equality. the area of inequality. the Gini coefficient.

(*)

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d. e.

the quantile ratio. the cumulative percentage of the population.

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Chapter 4: Measuring the performance of the economy

DISCUSSION QUESTIONS

1. a. Differentiate between the GDP and GNI (GNP) measures of national income and explain why such a distinction is considered useful by a macroeconomist. b. Describe and compare the three ways of measuring a countrys GDP. 2. a. Define the GDP and explain why GDP figures are important for policy makers. b. Why is the GDP not a sufficient indicator of macroeconomic performance? What other indicators are important and why?

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Chapter 4: Measuring the performance of the economy

AN S W E R S T O M U L T I P L E C H O I C E Q U E S T I O N S

1. e There are five key macroeconomic objectives: full employment, price stability, economic growth, an equitable distribution of income and balance of payments stability. The population growth rate may affect macroeconomic outcomes (for example, if the population is growing at a faster rate than employment is growing) but influencing the population growth rate is not a key macroeconomic objective. Therefore the population growth rate is not a key macroeconomic variable. (pp. 6263) 2. d If we simply add up the value of output of all firms in the economy, including the value of intermediate goods produced by firms, then we introduce the problem of double counting and we will overestimate the value of production taking place in the economy. (pp. 6364) 3. b The total value of a loaf of bread can be calculated either as the value of bread when it has reached its final destination (sold by the grocer to the consumer for R2,25) or as the value added by each of the participants in the production process (R0,70 + R0,35 + R0,85 + R0,35 = R2,25). (pp. 6364) 4. e The grocer adds the value of R0,35 = (R2,20 R1,95) to the loaf of bread. (pp. 6364) 5. e GDP represents Gross Domestic Product, where gross means that no provision is made in the valuing of total product for capital equipment that is used up in the production process. Net Domestic Product is therefore Gross Domestic Product net of consumption of fixed capital (depreciation of capital equipment). (pp. 6667) 6. b If dairy farmers receive a subsidy, then they can supply milk at a price that is less than the cost of producing this milk. We would, therefore, expect the value of a litre of milk (measured by the costs of producing this milk) to be greater than the market price for a litre of milk. (p. 67) 7. d Prices may be greater than the factor costs of producing a good if indirect taxes are included in the amount paid. Prices may be lower than factor costs if producers receive subsidies. (p. 67) 8. c If 2000 is chosen as the base year for real GDP calculations, then real GDP in 2000 will equal nominal GDP in 2000 prices. In other words, in 2000 nominal GDP will equal real GDP. (pp. 6869) 9. b GDP at current prices (nominal GDP) will be greater than GDP at constant prices (real GDP) because of inflation. (pp. 6869)
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Chapter 4: Measuring the performance of the economy

10. e The nominal value of a R100 note has not changed since the note was first introduced in South Africa: the rand value of a R100 note remains one hundred rands. However, the real value has decreased. As a result of inflation, R100 today buys less than R100 bought in the past. (p. 68) 11. a GNI represents the value of all income earned by South Africans both in South Africa and abroad. To obtain the GNI, income earned by foreigners working in South Africa must be subtracted from the GDP, and income earned by South Africans abroad must be added to the GDP. If income earned by foreigners is greater than income earned by South Africans abroad, then South Africas GDP will be greater than its GNI. (pp. 69, 71) 12. b GDE represents the value of spending within a country. It therefore includes spending on imports and excludes spending on exports (for this represents spending by the rest of the world). The GDP represents the value of all goods and services produced in a country. Imports are produced in other countries, and therefore must be excluded from the calculation of GDP; exports are produced in the country, and therefore must be included in the calculation of GDP. (p. 73) 13. e Gross Domestic Expenditure indicates the total value of spending on goods and services within the borders of the country (including spending on imports and excluding spending in other countries on exports). The value of Gross Domestic Expenditure = consumption expenditure + government expenditure + gross capital formation (investment expenditure) = R10 500 + R3 000 + R2 200 = R15 700. Note that already included in these expenditure categories is spending on imports, which is why import expenditure is not added to the calculation. (pp. 72 73) 14. d Gross Domestic Product represents the value of all final goods and services produced in a country. To obtain GDP from GDE, we need to subtract spending on imports (which are produced abroad) and include spending on exports (which are produced domestically). GDP therefore equals R15 700 R1 000 + R1 200 = R15 900. Net Domestic Product is GDP net of consumption of fixed capital (depreciation), and therefore = R15 900 R500 = R15 400. (pp. 67, 73) 15. d The unemployment rate = [(number unemployed) / (economically active population)] 100. The economically active population includes all those working or willing and able to work = 16 million employed + 4 million unemployed. The unemployment rate in this example therefore equals [4 million/20 million] 100 = 20%. (p. 74) 16. c Real purchasing power refers to how much the consumer can actually purchase (taking into account the prices of goods and services). (pp. 74, 78) 17. b The inflation rate between two years is calculated as:

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Chapter 4: Measuring the performance of the economy

[(CPI in year 2 CPI in year 1)/CPI in year 1] 100. (pp. 7478) 18. c In Mythopia, the CPI increased between 1998 and 2000. In 2000, the Myth could only buy a fraction of what it could buy in 1998. This fraction can be calculated by the ratio between the price levels in 1998 and 2000 = 100/120,8 = 0,83. Between 1998 and 2000, the purchasing power of the consumers Myth thus fell from 1 Myth to 0,83 cents. (pp. 7478) 19. a The inflation rate in 2000 = [(120,8 112,1)/112,1] 100 = 7,8%. (pp. 7478) 20. b If the inflation rate was 8% in 2001 then the CPI in 2001 can be calculated by:

8 x 120,8 x 120,8 120,8 100 = 8 120,8 = 100 x = 130,464


Rounding to one decimal place, the CPI in 2001 = 130,5. (pp. 7478) 21. a The current account records the net value of all sales to the rest of the world (exports) and all purchases from the rest of the world (imports), as well as flows of services and income. (p. 79) 22. e The capital (or financial) account reflects financial flows in and out of the country. If the capital account is in surplus then financial inflows have been greater than financial outflows. (p. 79) 23. c In order to construct the Lorenz Curve, we first need to order the population from poorest to richest, so that we can then establish the relationship between the cumulative percentage of the population and the cumulative percentage of income earned. (pp. 8081) 24. d Population Percentage Income Population Poorest 20% Next 20% Next 20% Next 20% Richest 20% 5 5 15 35 40 20 40 60 80 100 Income 5 10 25 60 100 Cumulative Percentage

The richest 20% of the population earn 40% of total income; the next richest 20% of the population earn 35% of total income. Therefore the richest 40% earn 75% of total income. By the same reasoning, the poorest 40% of the population earn 10% of total income. (pp. 8081) 25. b

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Chapter 4: Measuring the performance of the economy

The area between the diagonal for perfect equality and the Lorenz curve reflects how far from perfect equality the actual income distribution is. In other words, the area represents the area of inequality. (pp. 8081)

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