Chapter 5

GDP: A Measure of Total Production and Income

1) The total production within an economy is measured as
A) Gross Home Product.
B) Total Domestic Output.
C) Annual Production Value.
D) Gross Domestic Product.
E) Total Annual Output.
Answer: D

2) Gross Domestic Product is equal to the market value of all the final goods and
services ________ in a given period of time.
A) produced within a country
B) consumed within a country
C) consumed by the citizens of a country
D) produced by the citizens of a country
E) produced and consumed within a country
Answer: A

3) Wobet is a small country that produces only steak and potatoes. Steaks have a price
of $10 each and potatoes have a price of $1 each. Suppose that Wobet produces 10
steaks and 20 potatoes in 2010. Using ________, Wobet has GDP equal to ________.
A) market value; 30 units
B) a market basket; 30 units
C) market value; $120
D) real value; $120
E) a price index; $120
Answer: C

4) To calculate GDP it is necessary to add up the market value of all the ________
produced within a country during a year.
A) goods but not services produced
B) goods and services produced
C) intermediate goods and services produced
D) final goods and services produced
E) intermediate goods and services produced and all the final goods and services produced
Answer: D

5) If you make dinner for yourself

A) the market value of your dinner is added to GDP.
B) your service in preparing the meal is valued at a cook's wage and added to GDP.
C) none of what you bought to prepare for dinner is included in GDP.
D) only the market value of ingredients that you purchased this year is added to GDP.
E) the difference between the cost of the ingredients that you purchased this year and the
market value of the dinner is added to GDP.
Answer: D
6) Consumption expenditure includes spending
A) on intermediate goods and services by firms.
B) on office supplies by firms.
C) by households.
D) by households and spending on office supplies by firms.
E) by governments when they are buying goods and services that consumers also buy.
Answer: C

7) Investment is the expenditure done by

A) savers.
B) firms.
C) governments.
D) the rest of the world.
E) Both answers A and B are correct.
Answer: B

8) Investment is defined as the purchase of

A) any financial asset only.
B) additions to inventories only.
C) financial assets and inventories only.
D) the purchase of new capital goods and additions to inventories.
E) the purchase of new capital goods but not additions to inventories.
Answer: D

9) In measuring GDP, which of the following is included?

A) the value of preparing meals at home
B) the value of stocks and bonds bought and sold
C) the value of used goods when they are sold
D) the value of increases in business inventories
E) the value of durable consumption goods but not the value of nondurable consumption
goods.
Answer: D

10) In calculating GDP, we must

A) add the market value of imports and subtract the market value of exports.
B) add the market value of exports and subtract the market value of imports.
C) exclude net exports of goods and services (NX).
D) add the value of the goods produced outside of the United States by American firms.
E) subtract the market value of imports, because these goods are produced in a country other
than the United States, and subtract the market value of exports, because these goods are
consumed in a country other than the United States.
Answer: B

11) Which of the following expenditure components of GDP can be negative or

positive?
A) Consumption expenditure
B) Investment
C) Government expenditure on goods and services
D) Net exports of goods and services
E) None of the above because expenditure can never be negative.
Answer: D

12) Undistributed profits ________ counted as part of GDP because ________.

A) are not; households are not paid by the firms.
B) are; they can be used to buy other goods.
C) are ; they are considered income paid to households and loaned back to firms.
D) are not; they are considered an intermediate good.
E) are; firms are required to pay corporate income taxes on them.
Answer: C

13) The abbreviation "GDP" stands for

A) Gross Domestic Product.
B) Gross Domestic Prices.
C) General Domestic Prices.
D) Great Domestic Prices.
E) Government's Domestic Politics.
Answer: A

14) The expenditure approach to measuring GDP is done by using data on only
A) consumption expenditure.
B) consumption expenditure and investment.
C) consumption expenditure, investment, government expenditure on goods and services,
and net exports of goods and services.
D) consumption expenditure, investment, and government expenditures.
E) wages, rent, interest, and profit.
Answer: C

15) In 2009 in the kingdom of Saudi Arabia , consumption expenditure was $9,996
billion, investment was $1,559 billion, government expenditures on goods and services
were $2,927 billion, and total exports were $1,492 billion. GDP equaled
A) $12,641 billion.
B) $10,120 billion.
C) $11,488 billion.
D) $14, 415 billion.
E) some amount, but there is not enough information given to calculate GDP.
Answer: E

16) Based on the data in the table above, what does GDP equal?
A) $10,200 billion
B) $10,400 billion
C) $10,000 billion
D) $9,800 billion
E) $8,900 billion
Answer: C

17) The table gives data for a nation. What is the amount of the country's GDP?
A) $6,000 billion
B) $6,200 billion
C) $6,600 billion
D) $6,900 billion
E) $5,800 billion.
Answer: B

18) The table gives data for a nation. The value of the country's net exports of goods
and services shows that the country's
A) value of its exports exceeded the value of its imports.
B) value of its imports are negative.
C) net exports of goods and services are decreasing.
D) value of its imports exceeded the value of its exports.
E) value of its imports must equal zero.
Answer: A

19) The value of used goods ________ counted as part of GDP ________.
A) are; as long as they are classified as consumption goods.
B) are; as long as they are classified as investment goods.
C) are not; because they were counted during the period when they were counted as new
goods.
D) are not; because most fall in value and would cause a decrease in the value of GDP.
E) may be; as long as their value has risen.
Answer: C

20) Spending on financial assets ________ counted as part of GDP ________.

A) are; because the cash exchanged represents an expenditure
B) are not; because their purchase is not spending on goods or services
C) are; as long as their purchase produces income
D) are not; because interest must be paid on them
E) may be; as long as their value increases
Answer: B
21) The income approach to measuring GDP is based on summing
A) the production of each industry.
B) wages, interest, rent, and profits.
C) the values of final goods, intermediate goods and services, used goods, and financial
assets.
D) consumption expenditure, investment, government expenditures on goods and services,
and net exports of goods and services.
E) consumption expenditure and wages.
Answer: B

22) In 2009 in the kingdom of Saudi Arabia, net domestic product at factor cost was
$11,091 billion. Additionally, rent was $2,000 billion, profits were $1,000 billion, and
interest was $358 billion. Hence wages were
A) $7,733 billion.
B) $9,091 billion.
C) $10,091 billion.
D) $8,091 billion.
E) $12,091 billion.
Answer: A

23) When measuring GDP by the income approach, wage income includes
i) health-care insurance paid for by the firm for its employees
ii) Social Security contributions made by the firm
iii) wages paid during a worker's vacation time
A) i, ii and iii.
B) i and ii only.
C) i only.
D) ii only.
E) ii and iii only.
Answer: A

24) Adding wages, interest, rent, and profits yields

A) gross domestic product.
B) gross domestic product at factor cost.
C) net domestic product at factor cost.
D) GNP.
E) total expenditure.
Answer: C

25) If the statistical discrepancy is zero, in order to calculate GDP from the value of net
domestic product at factor cost, we must add
A) the value of intermediate goods and subtract the value of imports.
B) direct taxes, subtract corporate profit, and add investment.
C) indirect taxes, subtract subsidies, and add depreciation.
D) subsidies, subtract indirect taxes and depreciation.
E) indirect taxes, subsidies, and depreciation.
Answer: C

26) To calculate GDP using the income approach, one of the adjustments made to net
domestic product at factor cost is to
A) add depreciation.
B) add investment.
C) subtract investment.
D) add consumption expenditure.
E) subtract indirect taxes less subsidies.
Answer: A

27) Last year for a nation to the south, net domestic product at factor cost equaled
$3,300 billion. Indirect taxes minus subsidies equaled $200 billion, depreciation equaled
$800 billion, the statistical discrepancy equaled zero, and net operating surplus equaled
$150 billion. The country's GDP was
A) $2,300 billion.
B) $3,500 billion.
C) $4,300 billion.
D) $4,450 billion.
E) $4,150 billion.
Answer: C

28) The table above has information about an economy. Using this information, GDP
equals
A) $6,500 billion.
B) $7,800 billion.
C) $7,000 billion.
D) $8,500 billion.
E) some amount that cannot be calculated without information on the amount of government
expenditures.
Answer: B

29) Using the information in the table above, what does GDP equal?
A) $365 billion
B) $350 billion
C) $650 billion
D) $380 billion
E) GDP cannot be calculated without information on the amount of investment.
Answer: D

30) The expenditure approach values ________ and the income approach values
________.
A) goods and services at market prices; services at factor prices
B) goods and services at market prices; goods and services at factor prices
C) only goods at market prices; only services at factor prices
D) services only at factor prices; goods only at market prices
E) goods and services at factor prices; goods and services at market prices
Answer: B

31) Real GDP measures the value of goods and services produced in a given year valued
using
A) base year prices.
B) prices that prevail the same year.
C) no prices.
D) future prices.
E) real rather than nominal prices.
Answer: A

32) Nominal GDP measures the value of goods and services produced in a given year
valued using
A) constant prices.
B) prices of the same year.
C) no prices.
D) future prices.
E) base year prices.
Answer: B

33) Nominal GDP increases

A) only if total production increases.
B) only if prices increase.
C) if either prices and/or total production increase.
D) only if the productivity of resources increase.
E) only if depreciation decreases.
Answer: C

34) If nominal GDP increases this year, then real GDP

A) must decrease.
B) must increase.
C) must not change.
D) could increase, decrease, or not change.
E) could either increase or not change but cannot decrease.
Answer: D

Data for 2009 Data for 2010

35) The table above gives the production and prices for a small nation that produces
only bread and soda. The base year is 2009. What is nominal GDP in 2009?
A) $410
B) $450
C) $900
D) $550
E) $460
Answer: B

36) The table above gives the production and prices for a small nation that produces
only bread and soda. The base year is 2010. What is real GDP in 2010?
A) $530
B) $1080
C) $510
D) $210
E) $300
Answer: C

37) The business cycle describes

A) the change in potential GDP over time.
B) the change in the standard of living across countries.
C) the behavior of real GDP over time.
D) the behavior of nominal GDP over time.
E) the behavior of GNP over time.
Answer: C

38) The business cycle is defined as

A) changes in the stock market.
B) changes in financial markets.
C) persistent growth in potential GDP.
D) irregular ups and downs in production and jobs.
E) the period of time during which the unemployment rate is rising.
Answer: D

39) The relationship between real GDP and potential GDP over the business cycle can
be best summarized by which of the following statements?
A) Real GDP fluctuates around potential GDP.
B) Real GDP is always equal to potential GDP.
C) Real GDP cannot be greater than potential GDP.
D) Real GDP cannot be less than potential GDP.
E) Real GDP cannot be equal to potential GDP.
Answer: A

40) A business cycle has two turning points, which are the
A) recession and trough.
B) peak and recession.
C) trough and peak.
D) expansion and recession.
E) peak and expansion.
Answer: C

41) The business cycle has two phases,

A) expansion and peak.
B) recession and trough.
C) peak and trough.
D) recession and expansion.
E) expansion and trough.
Answer: D

42) In order to be classified as a recession, a contraction of general economic activity

must last at least
A) one year.
B) six months.
C) one period.
D) one quarter.
E) None of the above because recessions do not have a minimum length.
Answer: B

43) A recession runs from the

A) peak of the business cycle to its trough.
B) peak of the business cycle to a recovery.
C) expansion of a business cycle to its peak.
D) trough of a business cycle to its peak.
E) trough of a business cycle to its expansion.
Answer: A

44) As measured, GDP omits which of the following?

i. Illegal sales of goods and services.
ii. Changes in the amount of leisure time.
iii. Household production of goods and services.
A) i only
B) i and ii
C) ii and iii
D) i and iii
E) i, ii, and iii
Answer: E
45) Goods and services such as environmental quality, leisure time, and household
production are not included in GDP because they are not
A) productive activities.
B) for consumption.
C) bought in markets.
D) made for profit.
E) really durable goods.
Answer: C

46) As more women decide to work outside the home and therefore hire others to work
around their home, GDP will increase by
A) only the value of the output produced by the newly working women.
B) the value of the output produced by the newly working women minus the value of the
household work they were previously performing.
C) the value of the output produced by the newly working women plus the value of any
household work they are now hiring someone to perform.
D) only the value of the household work they are now hiring someone to perform.
E) the value of the household work they were previously performing minus the value of the
output produced by the newly working women.
Answer: C

Essay: Measuring GDP

1) Investment, as included in GDP, consists of what?
Answer: Investment is the purchase of new capital goods such as tools, instruments,
machines, buildings, and other constructions and additions to inventories. Investment does
not include the purchase or sale of stocks and bonds.

2) What are the categories of expenditure used in the expenditure approach to

measuring GDP?
Answer: There are four expenditure categories. The expenditure approach calculates the
sum of consumption expenditure, investment, government expenditure on goods and
services, and net exports of goods and services. Net exports of goods and services are the
difference between exports of goods and services and imports of goods and services.

3) The table above gives the values of different expenditures in the United States during
1999. Answer the following questions about the United States.
a. What was the value of net exports of goods and services in 1999?
b. What was (nominal) GDP equal to in 1999?
c. What was the (nominal) value of total production equal to in 1999?
Answer:
a. Net exports of goods and services equals the value of exports of goods and services, $998
billion, minus the value of imports of goods and services, $1,252 billion, or -$254 billion.
b. GDP equals the sum of consumption expenditure, $6,258, plus investment, $1,623, plus
government expenditure on goods and services, $1,630, plus net exports, -$254, or $9,257
billion.
c. The value of total production equals the value of GDP, so total production was $9,257
billion in 1999.

4- The data for an country in billions of U.S. dollar was: compensation of employees =
200 , net operating surplus = 300 , Indirect taxes = 50 , Subsidies = 20 , Depreciation =
60 , Statistical discrepancy = 10 , Net factor income from abroad = 120 , retained
profits = 25 , consumption expenditure = 180 , personal income taxes = 60 , and
transfer payments = 65.
Calculate the Disposable income for this country?
Answer:

compensation of employees 200

- net operating surplus + 300
------------------------------------------------------------
Net domestic product at factor cost 500
+ Indirect taxes + 50
- Subsidies - 20
-------------------------------------------------------------
Net domestic product at market price 530
+ Depreciation + 60
-------------------------------------------------------------
GDP ( income approach) 590
+ Statistical discrepancy + 10
-------------------------------------------------------------
GDP( Expenditure approach) 600
+ Net factor income from abroad + 120
-------------------------------------------------------------
Gross national product (GNP) 720
- Depreciation - 60
--------------------------------------------------------------
Net national product 660
- Statistical discrepancy - 10
--------------------------------------------------------------
National income 650
- retained profits - 25
+ transfer payments + 65
---------------------------------------------------------------
Personal income 690
- personal income taxes - 60
----------------------------------------------------------------
Disposable income 630