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Chapter 6

1. The reason economists include only the value of final goods and services when they calculate GDP is that intermediate goods A) do not create value added. B) do not add to economic welfare. C) have no social value. D) would be double counted otherwise.

2. If national income equals $4,500, employment taxes equal $400, corporate profit taxes equal $250, corporate retained earnings equal $300, transfer payments equal $500, and personal income taxes equal $600, then personal income equals A) $2,450. B) $3,450. C) $3,750. D) $4,050.

3. In comparing the per capita GDPs of two countries, purchasing power parity adjusts for differences in A) exchange rates. B) non-market activities. C) populations. D) relative prices.

4. A) B) C) D)

Which of the following is an example of an intermediate product? A pair of skis sold by a sporting goods retailer to a skier. A share of IBM stock. The lumber produced by Boise Cascade and sold to a builder of new houses. An antique car sold to the highest bidder.

5. A) B) C) D)

Which of the following is not a limitation of national income accounting? Measurement error. The use of real GDP to measure changes in economic activity over time. The use of real GDP to measure changes in social welfare over time. Misinterpretation of subcategories.

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Firm Y buys $150 worth goods from firm X. B) $2.800.825. what is the economy's GDP? A) $1. net exports. There are three firms in an economy: X. and Z.700. and $50 worth goods from firm Y and produces 500 units at $2 per unit. $155 billion. 7. A) B) C) D) In calculating GDP. Firm X buys $200 worth of goods from firm Y and $300 worth goods from firm Z and produces 250 units of output at $4 per unit.775. Page 2 . a measure of income available for spending by Canadian households. 8. the best measure of income earned in the nation. $150 billion. D) $3. the largest component of total Canadian expenditures is investment. and $ 250 worth goods form firm Z and produces 300 units of output at $6 per unit. government spending. Use the following information to answer the question. 9. Y. NDP equals $ billions 20 45 55 35 35 30 70 15 Exports Imports Gross investment Net foreign factor income Government expenditures Government transfer payments Personal consumption Depreciation A) B) C) D) $120 billion. A) B) C) D) Disposable personal income as measured in the National Income Accounts is greater than national income. Firm Z buys $75 worth goods from X. C) $2. Use the following table to calculate net domestic product. equal to real GDP. personal consumption. Given this information.6. $135 billion.

Page 3 . which of the following is NOT included in the government expenditures account? A) Government purchases of pencils. 12. profit. Which of the following is the best measure available to compare changes in standards of living among countries over time? A) Changes in nominal income. excluded from both GDP and GNI. is the reduction in business inventories per year. transfer payments. For the purposes of calculating GDP using the expenditure approach. A) B) C) D) Depreciation estimates the decrease in value of capital goods due to wear and tear over the year. C) Social assistance payments to the poor. A) B) C) D) The value of intermediate goods is included in both GDP and GNI. B) Changes in nominal per capita income. 11. 14. 15. D) Changes in real per capita income. D) The government's purchase of a computer. such as haircuts. represents a firm's expenditure in adding to its capital stock. business taxes.10. then paid for in cash to avoid income tax. included in GNI but not GDI. Which of the following economic activities would be included in Canadian gross domestic product (GDP)? A) Illegal drug sales. included in GDP but not GNI. B) The payroll of the federal government. B) Services. D) Work performed. C) Prostitution. 13. C) Changes in real income. A) B) C) D) The key to the equality of output and income is employee compensation. is the decline in the value of a firm's stock.

C) is a useful tool for microeconomists. D) can be used to measure a nation's output but not its production or consumption. the value of consumption goods is equal to the value of factor services. Use the following to answer question 17: GNI Investment Government consumption and investment Depreciation GDP In trillions of dollars 4. A) B) C) D) Refer to the table above.16. A) B) C) D) The national income identity shows that the value of factor services is equal to the value of final goods plus investment.2 1.5 0. the value of factor services is equal to the value of final goods plus savings.6 trillion. $6. 18.3 1. National income accounting A) provides a set of rules for determining macroeconomic policy.0 trillion.2 trillion. B) provides a set of rules and definitions for measuring economic activity in the aggregate economy. $7. Page 4 . adding up the income earned by a country's residents. A) B) C) D) Double counting in the national income accounts will occur if GDP is computed by adding up final output sales.4 6.6 17. 19. adding up value added. the value of factor services is equal to the value of final goods sold. Net domestic product cannot be computed without the data for net exports. adding up all sales. What is the economy's net domestic product? $6.

leave the relative value of output in developing countries unchanged. Page 5 .093 billion. B) Irish net foreign factor income to be zero. C) $1.067 billion. then one will likely expect A) Irish net foreign factor income to be positive. C) Irish GDP to exceed Irish GNI. D) $2. If Saudi Arabia has invested substantially more money in foreign countries than foreigners have invested in Saudi Arabia. A) B) C) To calculate GDP add the quantity of all final goods and services produced in an economy in a year. add the quantity of all goods and services sold in an economy in a year. D) Saudi GNI to exceed Saudi GDP. lower the relative value of output in developing countries. show that prices in developing countries are higher than prices in developed countries. B) $1. D) weight the output of each good and service produced in an economy in a year by its price in that year and then add the results. A) B) C) D) Purchasing power parity will most likely increase the relative value of output in developing countries. B) Saudi net foreign factor income to be zero. If substantially more foreign money is invested in Ireland than Irish citizens have invested abroad.20.580 billion and net investment was $513 billion. 22. 23.324 billion. therefore depreciation was A) $513 billion. C) Saudi GDP to exceed Saudi GNI. In 1998. D) Irish GNI to exceed Irish GDP. weight the output of each final good and service produced in an economy in a year by its price in that year and then add the result. 21. gross investment was $1. then we might expect A) Saudi net foreign factor income to be negative. 24.

170. 200. Use the following to answer question 26: Consumption Investment Transfer payments Government expenditures Exports Imports Net foreign factor income In billions of dollars 3. 10 percent. A) B) C) D) To move from gross domestic product (GDP) to gross national product (GNI). 27. dividing GDP by population. A) B) C) D) Calculate net exports using the table above.25. 28. A) B) C) D) If inflation is 10 percent and nominal GDP goes up 20 percent. adding GDP and population. 450. subtract depreciation from GDP. 30 percent. 20 percent.000 650 450 -30 26. add depreciation to GDP.600 800 750 1. subtract net foreign factor income from GDP. add net foreign factor income to GDP. multiplying population by GDP. real GDP goes up approximately 1 percent. Page 6 . 650. A) B) C) D) Per capita gross domestic product (GDP) is calculated by dividing population by GDP.

9 trillion.6 trillion. real output fell. B) rents. Use the following to answer question 31: GDP Government purchases Transfer payments Exports Imports Net foreign factor income In trillions of dollars 5.1 trillion.X . Page 7 . There is not sufficient information to compute consumption.4 0. What is consumption in this economy? $3. D) profits.5 0. A) B) C) D) Suppose that both nominal GDP and prices double. GDP = C + I + G + X .2 0. C) employee compensation. the amount the firm must pay for the use of those funds is counted in the national income and product accounts as A) interest. real output doubled. $4. A) B) C) D) Which of the following equations is the correct equation for GDP? GDP = C + I + G. GDP = C + I + G + X + IM.0 0. GDP = C + I + G .IM.29. 32. A) B) C) D) Refer to the table above. 30. real output remained constant. If a firm sells bonds on the capital market.IM. $3.0 1.4 31. We can conclude that real output more than doubled.

C) nominal GDP. Use the following to answer question 38: Page 8 .33. was developed by Keynesian economists. adding the value of output to the value of inputs. has dominated economic discourse since Adam Smith and The Wealth of Nations. D) real GDP. 35. 36. A) B) C) D) Value added is calculated by subtracting the cost of materials used in production from the value of sales. A) B) C) D) Comparisons of GDP levels across countries are most accurate when the value of non-market activities is the same across countries. Rent. A) B) C) D) Which of the following is a stock concept? Income. Wealth. The total annual market value of a nation's final output of goods and services computed at existing prices is called A) net national product. adding the cost of materials used in production to the value of sales. subtracting the value of sales from the cost of materials used in production. measures microeconomic concepts. 34. Expenditures. B) national income. prices for non-market activities are the same across countries. prices and the value of non-market activities are the same across countries. 37. A) B) C) D) National income accounting defines relationships among firms. prices are the same across countries.

0 0. Page 9 . $3. $135 billion.Exports Imports Gross investment Net foreign factor income Employment (CPP. Use the following to answer question 39: GDP Government purchases Transfer payments Exports Imports Net foreign factor income In trillions of dollars 5.9 trillion.4 39.0 1. A) B) C) D) Use the table above to calculate personal income.4 trillion. $4. $155 billion. $150 billion.5 0.1 trillion. There is not sufficient information to compute GNI.2 0. A) B) C) D) Refer to the table above. EI) taxes Personal income taxes Indirect business taxes Corporate retained earnings Corporate income taxes Government transfer payments Government expenditures Personal consumption Depreciation $ billions 20 45 55 35 15 10 15 10 10 30 50 70 15 38. Personal income equals $115 billion.4 0. What is GNI in this economy? $5.

A movie ticket. foreign investment. A) B) C) D) Gross private domestic investment is investment purchases by business firms. A) B) C) D) Which of the following would not be included in personal consumption expenditure? College tuition. 44. A) B) C) D) National income accounting is useful because it makes it possible to measure aggregate economic activity. D) A firm reduces its pollution by changing its production process in a way that does not affect its costs or its revenues. because it defines the relationships between subaggregates such as consumption and investment. aggregate final output of the citizens and businesses of an economy in a one-year period. 43. because it makes it possible to measure a nation's production and consumption. Police protection. A) B) C) D) Value added by individuals and business in a nation in a year equals the value of intermediate products. B) A firm hires local teenagers 10 hours a month to clean up trash from a local park. total profits.40. total market value of all goods and services produced in an economy in a one-year period. Which of the following economic activities would NOT be included in U. investment purchases by government. the value of investment goods. 42. Page 10 . C) A firm sells machinery that is used to extract PCPs from the waterways. A Personal computer. purchases by investment banks. total market value of all final goods and services produced in an economy in a one-year period. GDP. for all of the above reasons. 41. 45. gross domestic product (GDP)? A) A firm changes its packaging to earth-friendly wrappers and charges 50 cents more per package. A) B) C) D) GNI is the aggregate output of the citizens and businesses of an economy in a one-year period.S.

interest. Page 11 .7 2. profit.6 0. exports minus imports.7 trillion. A) B) C) D) Net domestic product is a better measure of output than gross domestic product because it controls for depreciation. What is the economy's gross domestic product? In trillions of dollars 5.6 0. and government expenditures.46. A) B) C) D) Which of the following correctly lists the components of total expenditures? Consumption. depreciation. A) B) C) Comparisons of GDP levels across countries are least accurate when non-market activities are a small part of total economic activity. increases as depreciation increases. Rent. D) purchasing power parity prevails.6 Consumption Investment Government purchases Transfer payments Exports Imports A) B) C) D) $10. net foreign factor income. is a worse measure of output than gross domestic product because it is distorted by depreciation. investment. exports minus imports.5 trillion. 49. $11. and wages. 47. government expenditures.1 trillion. 48. investment. investment.3 trillion.6 0. prices differ across countries. depreciation. Consumption. prices differ across countries and non-market activities are a large part of total economic activity. $12.2 2. $11. net imports. cannot be computed since depreciation cannot be measured. transfer payments. Consumption. A) B) C) D) Gross investment differs from net investment by net exports. 50.

B Response: See the discussion of the limitations of national income accounting in the text. D Response: Nominal GDP must be adjusted for price level increases before comparisons over time can be made. 7. 8. B Response: GDP does not measure underground or illegal economic activity. A Response: Net domestic product = consumption + investment + government expenditures + net exports depreciation. D Response: Personal income is derived by subtracting employment taxes. A Page 12 . goods used to produce other goods) in GDP leads to double counting since the value of these goods is also reflected in the value of the final goods and services they are used to produce. 4. corporate profit taxes and retained earnings from national income and then adding transfers. C Response: Consumption accounted for 57% of total expenditures in 2003. D Response: Intermediate goods are goods used to produced other goods. C Response: GDP is the sum of the value added by the three firms.Answer Key 1. 5. 12. 2. or 2775. Since GDP and GNI include only the value of final goods and services. 14. 6. C Response: Intermediate products are products used as inputs in the production of some other product.e. 10. 3. D Response: Including the value of intermediate goods (i. which equals 500 + 1400 + 875. C Response: Disposable personal income is the income available to households for spending. It is what equates income and output. B Response: Profit is what remains after all other income is paid out. Dividing total real income by the population is a good indication of relative standards of living. 11. D Response: See the definition of purchasing power parity in the text. intermediate goods do not enter into GDP or GNI. 13. 9.

23. D Response: Net foreign factor income is the difference between the foreign income of citizens and the income of residents who are not citizens. This implies that net foreign factor income will be positive. 22. 18. C Response: Including the value of intermediate goods (i. which equals $6. using purchasing power parity will increase the relative value of output in developing countries. A Response: NDP = GDP . A Response: Since market prices are often lower in developing countries. 25. so GNI will exceed GDP in Saudi Arabia. If Saudi Arabia has invested more money in foreign countries than foreigners have invested in Saudi Arabia.e. goods used to produce other goods) in GDP leads to double counting since the value of these goods is also reflected in the value of the final goods and services they are used to produce. C Response: Transfer payments are spent and included in consumption or saved and channeled to investment. 19. it is likely that the foreign income of Saudi citizens will exceed income of Saudi residents who are not citizens. That is net foreign factor income will be negative and GDP will exceed GNI in Ireland. B Response: Depreciation is gross investment minus net investment ($1580-$513). If more foreign money is invested in Ireland than Irish citizens have invested abroad. 24. 21.2 trillion in this case. D Response: Page 13 . C Response: The national income identity shows that all income (value of factor services) equals all expenditures (value of goods sold to individuals). To include all good and services sold would be to double count. C Response: Net foreign factor income is the difference between the foreign income of one's citizens and the income of residents who are not citizens.15.depreciation. it is likely that the income of Irish residents who are not citizens will exceed the foreign income of Irish citizens. 16. B Response: See the definition of national income accounting in the text. Response: See the definition of depreciation in the text. C Response: Each good is weighted by its market price. 17. 20.

including Stone and Kuznets.26. 27. Because GDP measures the market value of the final output produced within a country's borders and GNI measures the market value of the final output produced by a country's citizens. 36. Since we do not know investment in this case. 31. and net exports (X-IM) equals total expenditure or GDP. and net exports. 34. real GDP (which controls for inflation) did not change. 35. 29. A Response: Interest includes payments for loans by households to firms. 30. government purchases. A Response: Value added is the increase in value that a firm or an individual contributes to a product or service. C Response: National income accounting was developed from the work of Keynesian macroeconomists. B Response: Net exports equal exports minus imports. 37. investment (I). government expenditure(G). the income earned abroad by domestic factor sources must be added to GDP and the income earned domestically by foreign factor sources must be subtracted from GDP in order to move from GDP to GNI. C Response: See the definition of nominal GDP in the text. All the others are defined with respect to time. B Response: Only wealth is a stock concept. B Response: Subtract nominal GDP growth from inflation to find real GDP growth as a first approximation. divide GDP by the country's total population. C Response: Since the entire increase in nominal GDP resulted from rising prices. Price differences also complicate such comparisons because these differences imply that the value of output may differ across countries even when the quantity of output is the same. we cannot determine consumption. Page 14 . D Response: Consumption equals the difference between GDP and the sum of investment. D Response: The sum of consumption (C). 32. 28. 33. C Response: The presence and extent of non-market activities complicates international comparisons of living standards because the value of these activities is not reflected in GDP. C Response: To arrive at per capita GDP.

39.depreciation . Police protection is part of government expenditures. Price differences also complicate such comparisons because these differences imply that the value of output may differ across countries even when the quantity of output is the same.IM). A Response: GDP = Consumption + Investment + Government purchases + Exports . C Response: The presence and extent of non-market activities complicates international comparisons of living standards because the value of these activities is not reflected in GDP. 41.Corporate retained earnings . 44. A Response: See the definition of gross private domestic investment in the text.corporate income taxes employment taxes. C Response: PI = NI + transfer payments . GNI = GDP + Net foreign factor income = 70+55+50+20-45 + 35= 185.Imports. D Response: National income accounting provides a means for combining subaggregates into a single aggregate measure of production and consumption that can then be used to gauge total economic activity. 43. 46.indirect business taxes = 185-15-15=155. D Response: Value added is the increase in value that a firm or an individual contributes to a product or service. NI = GNI . Page 15 . C Response: Personal consumption expenditures consist of household and individual purchases of services and durable and nondurable goods.38. A Response: GNI = GDP + Net foreign factor income. A Response: Since depreciation reduces investment and hence output. 42. Summing value added is one way to calculate GDP. D Response: GDP includes only market activities. C Response: Net investment equals gross investment less depreciation. 48. 47. B Response: GDP = C + I + G + (X . 50. B Response: See the definition of GNI in the text. PI = 155+30-10-10-15=150. 49. 40. accounting for depreciation produces a better measure of output. 45.