Macro Tut 1: Measuring a nation’s income

MULTIPLE CHOICE: Identify the choice that best completes the statement or answers the question.

1. Which of the following questions is more likely to be studied by a microeconomist than a macroeconomist?
a. Why do prices in general rise by more in some countries than in others?
b. Why do wages differ across industries?
c. Why do production and income increase in some periods and not in others?
d. How rapidly is GDP currently increasing?

2. For an economy as a whole,

a. wages must equal profit.
b. consumption must equal saving.
c. income must equal expenditure.
d. the number of buyers must equal the number of sellers.

3. In a simple circular-flow diagram, firms use the money they get from a sale to
a. pay wages to workers.
b. pay rent to landlords.
c. pay profit to the firms’ owners.
d. All of the above are correct.

4. Suppose an apartment complex converts to a condominium, so that the former renters are now owners of
their housing units. Suppose further that a current estimate of the value of the condominium owners' housing
services is the same as the rent they previously paid. What happens to GDP as a result of this conversion?
a. GDP necessarily increases.
b. GDP necessarily decreases.
c. GDP is unaffected because neither the rent nor the estimate of the value of housing services is
included in GDP.
d. GDP is unaffected because previously the rent payments were included in GDP and now the rent
payments are replaced in GDP by the estimate of the value of housing services.

5. Darla, a Canadian citizen, works only in the United States. The value of the output she produces is
a. included in both U.S. GDP and U.S. GNP.
b. included in U.S. GDP, but it is not included in U.S. GNP.
c. included in U.S. GNP, but it is not included in U.S. GDP.
d. included in neither U.S. GDP nor U.S. GNP.

6. Household spending on education is included in

a. consumption, although it might be argued that it would fit better in investment.
b. investment, although it might be argued that it would fit better in consumption.
c. government spending, based on the fact that most higher-education students attend publicly-supported
colleges and universities.
d. None of the above is correct; in general, household spending on services is not included in any
component of GDP.
7. During the current quarter, a firm produces consumer goods and adds some of those goods to its inventory
rather than selling them. The value of the goods added to inventory is
a. not included in the current quarter GDP.
b. included in the current quarter GDP as investment.
c. included in the current quarter GDP as consumption.
d. included in the current quarter GDP as a statistical discrepancy.

8. If net exports is a negative number for a particular year, then

a. the value of firms’ inventories declined over the course of the year.
b. consumption exceeded the sum of investment and government purchases during the year.
c. the value of goods sold to foreigners exceeded the value of foreign goods purchased during the year.
d. the value of foreign goods purchased exceeded the value of goods sold to foreigners during

9. In the economy of Wrexington in 2008, exports were $500, GDP was $6400, government purchases were
$1500, imports were $600, and investment was $2000. What was Wrexington’s consumption in 2008?
a. $1800
b. $2800
c. $3000
d. $4000

10. In the economy of Wrexington in 2008, consumption was $200, exports were $50, GDP was $325,
government purchases were $100, imports were $125, and investment was $100. What were Wrexington’s net
exports in 2008?
a. -$75
b. -$50
c. $50
d. $75

11. In the economy of Wrexington in 2008, consumption was $3000, GDP was $5500, government purchases
were $1000, imports were $2000, and investment was $1000. What were Wrexington’s exports in 2008?
a. -$1500
b. $500
c. $1500
d. $2500

12. In the economy of Wrexington in 2008, consumption was $2000, exports were $800, GDP was $4800,
government purchases were $840, and investment was $1400. What were Wrexington’s imports in 2008?
a. -$560
b. -$240
c. $240
d. $560

13. In the economy of Wrexington in 2008, nominal GDP was $18 billion and the GDP deflator was 120. What
was Wrexington’s real GDP in 2008?
a. $6.7 billion
b. $15 billion
c. $21.6 billion
d. $38 billion

14. In the economy of Wrexington in 2008, nominal GDP was $10 trillion and real GDP was $4 trillion. What
was Wrexington’s GDP deflator in 2008?
a. 25
b. 40
c. 250
d. 400

15. In the economy of Wrexington in 2008, nominal GDP was $28 trillion and real GDP was $32 trillion. What
was Wrexington’s GDP deflator in 2008?
a. 87.5
b. 114.3
c. 400
d. 896

Table 23-6
The table below contains data for the country of Togogo. The base year is 1974.

Year Nominal GDP GDP Deflator

1974 $2000 100
1975 $3000 120
1976 $3750 150
1977 $6000 200

16. Refer to Table 23-6. Which of the following is not correct?

a. This economy experienced growth from 1974 to 1975.
b. This economy experienced growth from 1975 to 1976.
c. This economy experienced growth from 1976 to 1977.
d. This economy experienced inflation from 1974 to 1975, from 1975 to 1976, and from 1976 to 1977.

17. Many things that society values, such as good health, high-quality education, enjoyable recreation
opportunities, and desirable moral attributes of the population, are not measured as part of GDP. It follows
that
a. GDP is not a useful measure of society's welfare.
b. GDP is still a useful measure of society's welfare because providing these other attributes is the
responsibility of government.
c. GDP is still a useful measure of society's welfare because it measures a nation's ability to
purchase the inputs that can be used to help produce the things that contribute to welfare.
d. GDP is still the best measure of society's welfare because these other values cannot actually be
measured.
EXERCISES AND PROBLEMS

Exercise 1: Fill the blank with NO MORE THAN 4 WORDS:

1. The GDP measures Measures the on the ……………………………………… economy’s output
of goods and services
2. In the circular flow diagram, households buy goods and services from firms, and the firms use
their revenue from sales to pay back ………………………………………….. on the market for
factors of production.
3. Government spending includes spending on goods and services by local and federal governments
but exclude ……………………………..
4. Nominal GDP measures production of goods and services valued ………………………..
5. For the economy as a whole, …………………….. must equal expenditure
6. If net exports is a positive number for a particular year, then the value of foreign goods purchased
……………………….the value of goods sold to foreigners during the year.
7. If real GDP doubles and the GDP deflator doubles, then nominal GDP ……………..
8. A …………….. economics textbook from the bookstore is excluded from the GDP this year.
9. A chocolate bar purchased at a convenience store is included in the GDP and …………………
increases.
10. A book publisher buys paper that will be used to print books. Paper is consider an
………………… to the publisher.

Exercise 2: Find the underlined parts that are incorrect in these statements and correct them:
11. New harvesting equipment for the farm is bought, hence GDP increases in consumption.
A B C D
12. Money gains purchasing power in periods of high inflation.
A B C D
13. To calculate nominal GDP, multiply the price of each good in current year times the quantity
A B C
produced of that good and then multiply together these products.
D
14. Joe has to keep changing prices at his gas station due to rapidly changing fuel prices, this is an
A B C
example of shoe-leather cost.
D
15. If nominal wages have risen by 50% over a ten-year period and aggregate prices have increased
A
by 40% in that next period, then we can safely conclude that the real wages of workers have
B
increased by 10 %.
C D

Problem 1
Suppose that an economy produces only three types of products: rice, milk and sugar. Quantity and price data for
these three products for two different years are shown in the table below:

Year Quantity of rice Price of rice Quantity of milk Price of milk Quantity of sugarPrice of sugar
 2008 2,000 $2 700 $1 600 $1

2009 1,800 $3 800 $9 500 $5

Calculate nominal GDP for each year of this economy

Year Calculation Nominal GDP

2008

2009

Calculate the real GDP for each year (base year 2008)

Year Calculation Real GDP

2008

2009

Calculate the GDP deflator for each year (base year 2008)

Year Calculation GDP deflator

2008

2009

Calculate the percentage change of nominal GDP and real in 2009?

Calculation Growth rate

Nominal GDP

Real GDP

Did economic well-being rise or fall in 2009? If it falled, why we still see nominal GDP rising in that year?

Problem 2
Identify the immediate effect of each of the following events on U.S. GDP and its components.

a. James receives a Social Security check.

b. John buys an Italian sports car.

c. Henry buys domestically produced tools for his construction company.

Problem 3
A farmer grows wheat, which he sells to a miller for $100. The miller turns the wheat into flour, which she sells to
a baker for $150. The baker turns the wheat into bread, which she sells to consumers for $180. Consumers eat the
bread.
a. a. What is GDP in this economy?
b. b. Value added is defined as the value of a producer’s output minus the value of the intermediate goods that the
producer buys to make the output. Assuming there are no intermediate goods beyond those described above,
calculate the value added of each of the three producers.
c. c. What is the total value added of the three producers in this economy? How does it compare to the economy’s
GDP? Does this example suggest another way of calculating GDP?