Measuring Domestic Output and National Income L True / False Questions 1) 2) 3) 6) 7) 8) 9) 10) 12) 13) 14) In determining GDP by the expenditures method, it is appropriate to use net investment rather than __ gross investment as a measure of investment spending. F Interest on the public debt is included as a part of government purchases in determining GDP by the expenditures method. F All expenditures on new construction are included as investment in calculating Gop. |. Personal income _usually exceeds disposable income. F Welfare payments to low-income families are included in national income. F Disposable income measures the before-tax income received by resource suppliers. F NDP can be determined by adding taxes on production and imports to GDP. fnominal GDP is 150 and the GDP price index is 200, real GDP is 75. If real GDP is 50 and nominal GDP is 100, the GDP price index is 200. > Gross output (GO) reflects the overall status of the productive side of the economy better than GDP does. The value added in an industry includes the wages earned by workers in the industry. A product that was produced in 2016 and not sold until 2017 is counted as part of GDP in 2016. T Personal consumption expenditures include expenditures for new houses. The value of a sale of a share of stock is considered to be an investment in national income accounting. G 16) 17) 18) 19) 20) 21) 22) 23) 24) 25) 26) 27) 28) Gross private domestic investment can be divided into replacement investment and net investment. Changes in business inventories are included as part of investment in the national income accounts. | In an economy, the value of inventories fell by $50 billion from Year 1 to Year 2. In calculating total investment for Year 2, national income accountants would increase it by $50 billion. F_ Net exports are positive when exports are greater than imports. [~ In the expenditures approach, transfer payments such as unemployment compensation are included in the G ‘component of GDP. National income (NI) is estimated as the sum of four categories of income (wages, rent, interest, profits) plus taxes on production and imports. ~ | Personal income (PI) is the income that households are free to spend or save as they please. F Disposable income (Dl) _ includes transfer payments like Social Security benefits and unemployment benefits. ~\_ To adjust nominal GDP for a given year in order to obtain real GDP, we multiply the nominal GDP by the price index. F When businesses have to install antipollution equipment to clean up their wastes, they are adding to GDP." T_ The value of a price index in the base year is always 100. | Do-it-yourself activities of people are a big part of the “underground economy." GDP tends to understate economic welfare because it does not take into account increases in leisure. | All activities included in GDP serve to enrich society. |- Multiple Choice Questions 1. The system that measures the economy's overall performance is formally known as A. national income accounting, B. business cycle measurement. )GDP assessment. D. final output and income statistics. 2. Anation's gross domestic product (GDP) is the dollar value of all final output produced within the borders of the nation during a specific period of time. B. is the dollar value of all final output produced by its citizens, regardless of where they are living. C. can be found by summing C+ In +5 + Xn. D. is always some amount less than C+ /g + G+Xn. 3. Anation's gross domestic product (GDP) can be found by summing C+ Ig + G+ Xn. 8. is the dollar value of the total output produced by its citizens, regardless of where they are living, C. can be found by summing C+5 + G+ Xn. D. is always some amount less than its NDP. 4, Suppose Smith pays $100 to Jones. ‘A. We can say with certainty that the GOP has increased by $100. 8, We can say with certainty that the GDP has increased, but we cannot determine the amount. C.We can say with certainty that the nominal GDP has increased, but we can't say whether real GDP has increased or decreased. We need more information to determine whether GDP has changed. 5, Suppose the total monetary value of all final goods and services produced in a particular country in 2015 is $500 billion and the total monetary value of final goods and services sold is $450 billion. We can conclude that A. GDP in 2015 is $450 billion. B. NDP in 2015 is $450 billion. © Gop in 2015 is $500 billion. D. inventories in 2015 fell by $50 billion 6. Gross domestic product (GDP) measures and reports output A. as an index number. in percentage terms. in dollar amounts and percentage growth. D. in quantities of physical units (for example, pounds, gallons, and bushels) 7. Final goods and services refers to A. goods and services that are unsold and therefore added to inventories. B. goods and services whose value has been adjusted for changes in the price level. goods and services purchased by ultimate Wsers, rather than for resale or further processing. D. the excess of U.S. exports over U.S imports. 8. If intermediate goods and services were included in GDP, @) the GDP would be overstated. B. the GDP would then have to be deflated {or changes in the price level. C. nominal GDP would exceed real GDP. D. the GDP would be understated. 9. Which of the following is an intermediate good? A. the purchase of gasoline for a ski trip to lorado (B) the purchase of baseball uniforms by a Professional baseball team C. the purchase of a pizza by a college student D. the purchase of jogging shoes by a professor 10. The value added of a firm is the market value of A.a firm's output plus the value of the inputs bought from others. a firm's output less the value of the inputs 2bought from others. C. the firm's output. D. the firm's inputs bought from others. 11. Alejandro Scoobertini owns a store specializing in soccer jerseys. In 2016, he purchased $150,000 worth of jerseys from manufacturers, employed one worker for $40,000, purchased $20,000 worth of supplies from an office supply store, and sold jerseys for $280,000. Based on this information, what was the value added at Alejandro's store in 2016? $70,000 B. $110,000 C. $280,000 D. $490,000 12, Nominal GDP differs from real GDP because A. nominal GDP is based on constant prices. 8. real GDP is based on current prices. real GDP results from adjusting for changes in the price level. D. nominal GDP results from adjusting for changes in the price level. 13, Arthur sells $100 worth of cotton to Bob. Bob turns the cotton into cloth, which he sells to Camille for $300. Camille uses the cloth to make prom dresses that she sells to Donita for $700. Donita sells the dresses for $1,200 to kids attending the prom. The total contribution to GDP of this series of transactions is @ $1,200. B. $500. C. $2,300. D. $1,100. 14. Which of the following transactions would be included in GDP? A. Mary buys a used book for $5 at a garage sale. B. Nick buys $5,000 worth of stock in Microsoft. C. Olivia receives a tax refund of $500, Peter buys a newly constructed house. 15. Value added refers to A. any increase in GDP that has been adjusted for adverse environmental effects. B. the excess of gross investment over net estment. CJ ine difference between the value of a firm's output and the value of the inputs it has purchased from others. D. the portion of any increase in GDP that is caused by inflation as opposed to an increase in real output. 16. Setup Corporation buys $100,000 of sand, rock, and cement to produce ready- mix concrete. It sells 10,000 cubic yards of concrete at $30 a cubic yard. The value added by Setup Corporation is A. $300,000. B. $100,000. @ $200,000. D. zero dollars. 17. If depreciation (consumption of fixed capital) exceeds gross domestic investment, we can conclude that A. nominal GDP is rising but real GDP is declining. G net investment is negative. C. the economy is importing more than it exports. D. the economy's production capacity is expanding 18. Economy A: gross investment equals depreciation Economy B: depreciation exceeds gross investment Economy C: gross: investment exceeds depreciation Other things equal, the information suggests that the production capacity in economy A. B is growing more rapidly than that in either economy A or C. B. A is growing more rapidly than that in either economy B or C.C. A is growing less rapidly than that in economy B. @) Cis growing more rapidly than that in ‘economy B. 19. If in some year gross investment was $120 billion and net investment was $65 billion, then in that year the country's capital, stock A. may have either increased or decreased. increased by $65 billion. icreased by $55 billion. D. decreased by $55 billion. @ 20. Which of the following is not economic investment? A. the purchase of a new drill press by the Manufacturing Company the purchase of 100 shares of AT&T by a retired business executive C. construction of 2 suburban housing project D. the piling up of inventories on a grocer's, shelf 21. Suppose that inventories were $80 billion in 2015 and $70 billion in 2016. In 2016, national income accountants would A. add $10 billion to other elements of investment in calculating total investment. subtract $10 billion from other elements of investment in calculating total investment. C. add $75 billion (= $150/2) to other elements of investment in calculating total investment. D. subtract $75 billion (= $150/2) from other elements of investment in calculating total investment. 22.Government _ purchases government spending on @ government consumption goods and public capital goods. B. government consumption goods only. C. public capital goods only. D. government consumption goods, public include capital goods, and transfer payments. 23. Personal Taxes $40 Social Security Contributions 15 Taxes on Production and Imports | 20 Corporate Income Taxes 40 Transfer Payments 2 USS. Exports 24 Undistributed Corporate Profits 35 Government Purchases, 90 Gross Private Domestic Investment | 75 US. Imports 2 Personal Consumption Expenditures | 250 Consumption of Fixed Capital 25 Net Foreign Factor Income 10 Statistical Discrepancy 0 Refer to the accompanying data (all fi figuresi in billions of dollars). NI is A.$362, GDR=C+TQ+G +X, B. $382, c.$447. NOP: Rove a pcatin @ s402. NieNOP- S.denfl 24, Refer to the accompanying data (all ures in billions of dollars). Pl is @Sesue B. $346. C, $408. D. $437. 5) eter to the accompanying data (all igures in billions of dollars). Dl is A. $284. B. $329, (Qs274, D. $402.26. Gross Investment $18 National Income 100 Net Exports 2 Personal Income 85 Personal Consumption Expenditures | 70 Saving 5 Government Purchases 20 Net Domestic Product 105 Statistical Discrepancy 0 Refer to the accompanying data (all figures in billions of dollars). Consumption of fixed capital is (a) $5. B. $10. C. $20. D. $30 27. Refer to the accompanying data (all figures in billions of dollars). From this information we can conclude that the net foreign factor income is oO! negative $5 billion. B. zero. C. positive $5 billion. D. positive $15 billion. 28. Personal Consumption Expenditures | $400 Government Purchases 128 Gross Private Domestic Investment | 88 Net Exports 7 Net Foreign Factor Income 0 Consumption of Fixed Capital 4B Taxes on Production and Imports 50 Compensation of Employees 369 Rents 2 Interest 15 Proprietors’ Income 52 Corporate Income Taxes 36 Dividends 24 Undistributed Corporate Profits 22 Statistical Discrepancy 0 Refer to the accompanying national income data for the economy. All figures are in billions of dollars. Net domestic product is A,$520. @)ss00. C. $623. D. $573. 29.Refer to the accompanying national income data for the economy. All figures are in billions of dollars. The national income is A. S561. B. $573. (sso. D. $530. Cahnete to the accompanying national income data for the economy. All figures are in billions of dollars. Disposable income cannot be determined from the data Biven, B. is $484, C. is $416, D. is $502 31. If net foreign factor income is zero and there are no statistical discrepancies, the sum of national income and the consumption of fixed capital equals A. disposable income. 8. personal income. C,net domestic product. gross domestic product.32. Suppose a nation's 2010 nominal GDP was $972 billion and the general price index was 90. To make the 2010 GDP comparable with the base year GDP, the 2010 GDP must be A. deflated to $678 billion. B. deflated to $896 billion. inflated to $1,080 billion. D. deflated to $1,080 billion. 33, Real GDP is ‘A. the nominal value of all goods and ervices produced in the economy. the nominal value of all goods and services produced in the domestic economy, corrected for inflation or deflation. C. that aggregate output that is produced when the economy is operating at full employment. always greater than nominal GDP. 34. Only three goods are produced in an economy in the following amounts: A = 10, B = 30, C= 5, The current year per-unit prices of these three goods are A = $2, B = $3, and C= $1. Nominal GDP in the current year is A. $110. $115. Cc. $45. D, $90. 35. (Advanced analysis) Only three goods are produced in an economy in the following amounts: A = 10, 8 = 30, C= 5. The current year per-unit prices of these three goods are A = $2, B = $3, and C = $1, If the per-unit prices of the three goods were each $1 ina base year used to construct a GDP price index, then the GDP price index in the current year is A, 205.5. (8 255.5. C. 393. D. 100. 36. (Advanced analysis) Only three goods are produced in an economy in the following amounts: A = 10, B = 30, C = 5. The current year per-unit prices of these three goods are A= $2, B = $3, and C = $1. If the per-unit prices of the three goods were each $1ina base year used to construct a GDP price index, then real GDP in the current year is A. $110. $115. D. $160. 37. When gross investment is positive, net investment A.is always zero B, must be negative. must be positive. may be either positive or negative. 38. National income is the sum of employee compensation, profits, and the following items, except A. rent. terest. depreciation or consumption of fixed ‘Capital. D. taxes on production and imports. 39. If the price index in year A is 130, this means that ‘A. prices in year A are on average 130 percent higher than in the base year. B. prices in year A are on average13 times that in the base year. prices in year A are on average 30 percent higher than in the base year. D. nominal GDP is 130 percent higher than real GDP in year A. 40. In year 1, nominal GDP for the United States was $2,250 billion and in year 2 it was $2,508 billion. The GDP deflator was 72 in year 1 and 79 in year 2. Between year 1 and year 2, real GDP rose by A.114 percent. B.9,7 percent.4 percent. (©) 1.6 percent. 41. The "underground economy" is mostly made up of A. unpaid work. @illegal activities. C. do-it-yourself activities. D. tax-evasion activities. 42. Gross output (GO) A. and GDP are equivalent measures of the final output of an economy. CB) sums together the dollar value of economic activity at the four stages of production. C. measures all economic activity leading up to but excluding final output. D. always equals an amount smaller than GDP. 43. Gross output (GO) for an economy in a given year A. will always be less than GOP for that economy in the same year. B. will always equal GDP for that economy in the same year. C. may be greater than or less than GDP for that economy in the same year. will always exceed GDP for that economy in the same year 44, Assume that in 2002 the nominal GDP was $350 billion and in 2003 it was $375, billion. On the basis of this information, we @) cannot make a meaningful comparison Of the economy's performance in 2002 relative to 2003. B. can conclude that the economy was achieving real economic growth. C.can conclude that real GDP was higher in 2002 than in 2003. D. can conclude that real GDP was lower in 2002 than in 2003. 45. A large underground economy results in an G understated Gor. B. overstated GDP. C. understated GDP price index. D. overstated GDP price index. 46. The following are examples of final goods in national income accounting, except lumber and steel beams purchased by a construction company. B. a tractor purchased by a construction company. C.a laptop computer purchased by an executive for personal use. D. a desktop computer purchased by an executive for business use. 47. All of the following are examples of intermediate goods, except jour bought by a bakery. n oven bought by a bakery. C. office supplies bought by an accounting firm. D. gasoline bought by a trucking company. 48. A business buys $5,000 worth of inputs from other firms in order to produce a product. The business makes 100 units of. the product and each of them sells for $65. The value added by the business to these products is ‘A. $5,000. B. $6,500. (©) $1,500. D. $1,000. 49. Suppose nominal GDP was $360 billion in 1990 and $450 billion in 2000. The appropriate price index (1985 = 100) was 120 in 1990 and 125 in 2000. Between 1990 and 2000, real GDP increased by $60 billion. B. decreased by $32 billion. C. increased by $100 billion. D. increased by $117 billion50. Only three goods are produced in an A. $110. economy in the following amounts: A=10, (8) $115. B= 30, C=5. The current year per-unit © $45. prices of these three goods are A = $2, B= D. $90. $3, and C= $1. Nominal GDP in the current year is |, Short-Answer, Essays, and Problems. 1. What is the value added by all the firms A-E from the production of a product as described below? What did each firm add separately in value and what does it total? Stage of production Sales value of product Firm A 91600 Firm B 2500 Firm C 3700 Firm D 5200 Firm E 7600 2. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in each instance. (2) A monthly scholarship check received by an economics student @xchbxd\o (b) The purchase of a new truck by a trucking company (0 Government purchase of missiles from a private business| (d) The purchase of a used tractor by a farmer 2 (e) The value of the purchase of shares of Microsoft by an individual © 3. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in each instance. (a) Social Security checks received bya retired person © (b) An increase in business inventories | (c) The income of a tax accountant working for a business ! (d) Income received from interest on a corporate bond! (e) The cashing In of a U.S. savings bond4, The following is a list of figures for a given year in billions of dollars. Using this data, compute: (a) GDP; (b) NDP; (c) NI; (d) PI; (e) DI; (f) Net exports. =3 462156433 Billions Billions of dollars of dollars Transfer payments $ 16 Consumption of fixed capital 4 Government purchases 80 Rents, 10 Personal taxes 38 U.S. Exports 4 Corporate income taxes 28 Corporate profits 70 Taxes on production and imports 15 Interest 12 Social Security contributions 8 Dividends 23 Undistributed corporate profits 19 Imports to U.S. v7 Proprietors’ income 25 Gross private domestic investment 63 Compensation of employees 258 Net foreign factor income 10 Personal consumption expenditures 322 _ Statistical discrepancy 35 5. The next four questions refer to the following price and output data over a five-year period for an economy that produces only one good. Assume that year 2 is the base year. Year Units of output Price per unit 1 16 $2 2 20 3 3 30 4 4 36 5 5 - 40 6 (a) If year 2is the base year, give the price index for year 3. (b) Give the nominal GDP for year 4. (c) What is the real GDP for year 4? (a) Tell which years you would deflate nominal GDP and which years you would inflate nominal GDP in finding real GDP.6. The following data show nominal GDP and the appropriate price index for several years. Compute real GDP for each year and indicate whether you have GDP in finding real GDP. All GDP are in billions. Year Nominal Price level RealGDP _ Inflated (I) GDP index Deflated (D) 1 $117 120 2 124 104 __ __ 3 143 85 1 4 149 96 _ _ 5 178 4112 _ _ 6 220 143 inflated” or “deflated” nominal 7. In 1997, GDP in the tiny country of Lindora was $4 million and the price of a market basket of goods was $15. In 2011, GDP in Lindora was $5 million and the price of a market basket of goods was $35. Given this information, it is clear that Lindora GDP had a higher level of production in 2011 than 1997. Evaluate this statement. 8. For each, indicate the dollar value that each contributes to each component of GDP. Assume that everyone in society gets p: contribute to GDP, write “none”: Ll G Xn a) Households spend 10,000 hours taking care of children. Of these, 8,000 hours are parents taking care of their own cildren{end 2,000) hours are spent on outside child care ‘other people’s homes and hours are spent cleaning ) Workers spend 12,000 hours on cleaning. Of these, 7,000 hours are spent cleaning their own val jours are spent cleaning businesses ‘) Businesses hire 4,000 hours of telephone technical support. Of these(3,000ours are by domestic firms and 1,000 hours are by foreign firms. d) The government hires¥#,000 hours of law enforcement personnel. e) Domestic businesses spend $10,000 on imported asparagus. They sell the asparagus to households for $25,000. 4) The government collects $50,000 in taxes. Of this, 640,000is spent ‘on food stamp programs and $10,000 is used to pay tax callectors. g) Firms import $10,000 of copper. They use half to make electronics, which they sell to the government for $20,000, and the other half is stored for next year. h) Better technology reduces time spent cooking at home by 4,000 hours. a wage of $10 per hour for their market labor. If an item does not 109. Suppose an economy measures the following levels of production in 2016: Output Type —_| Level of Output Resource $10 billion Extraction Production $12 billion Distribution SS billion Final Output __| $25 billion Calculate Gross Output (GO) and Gross Domestic Product (GDP) for 2016. Which is larger? Will this always be the case? 10. In 2000, GDP in the country of Alpha was $15 million and the price of a market basket was $20. In 2014, GDP in Alpha was $18 million and the market basket of the goods was $25. Given this information, it is clear that Alpha GDP had a higher level of production in 2001 than 2000 a