Topic 1 – Practice Questions

1. What components of Egyptian GDP would each of the following transactions affect?
Explain.
A. A family buys a new refrigerator.
Consumption increases because a refrigerator is a good purchased by a household.
GDP increases.
B. Lilyan buys a new house.
Investment increases because a house is an investment good. GDP increases.
C. Egypt Aluminium sells 50 tonnes of steel from its inventory.
Consumption increases because steel has been purchased, but investment decreases
because the steel in Egypt Aluminium’s inventory had been counted as an investment
good until it was sold. GDP does not change.
D. You buy a pizza.
Consumption increases because pizza is a good purchased by a household. GDP
increases.
E. Your parents buy a kilo of Greek olive oil.
Consumption increases because the bottle is a good purchased by a household, but net
exports decrease because the bottle was imported. GDP does not change.
F. Delta Galil Industries Ltd., a textile manufacturer, expands its factory in Egypt.
Investment increases because new structures and equipment were built. GDP
increases.

2. The government purchases component of GDP does not include spending on transfer
payments such as social security. Thinking about the definition of GDP, explain why
transfer payments are excluded.

G excludes transfer payments, such as social welfare or unemployment insurance

benefits. They are not made in exchange for a currently produced goods & services. In
fact, transfer payment alter household income, but they do not reflect the economy’s
production.

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3. Below are some data from the land of milk and honey.

Price Quantity
Quantity Price of
Year of of
of Milk Honey
Milk Honey
2011 $1 100 liters $2 50 liters
100
2012 $1 200 liters $2 liters
100
2013 $2 200 liters $4 liters

A. Compute nominal GDP, real GDP and the GDP deflator for each year, using 2011 as
the base year.
Calculating nominal GDP:
2011: ($1 per l. of milk × 100 l. milk) + ($2 per l. of honey × 50l. honey) = $200
2012: ($1 per l. of milk × 200 l. milk) + ($2 per l. of honey × 100 l. honey) = $400
2013: ($2 per l. of milk × 200 l. milk) + ($4 per l. of honey × 100 l. honey) = $800
Calculating real GDP (base year 2011):
2011: ($1 per l of milk × 100 l milk) + ($2 per l. of honey × 50 l honey) = $200
2012: ($1 per l of milk × 200 l milk) + ($2 per l of honey × 100 l honey) = $400
2013: ($1 per l of milk × 200 l milk) + ($2 per l of honey × 100 l honey) = $400
Calculating the GDP deflator:
2011: ($200/$200) × 100 = 100
2012: ($400/$400) × 100 = 100
2013: ($800/$400) × 100 = 200

B. Compute the percentage change in nominal GDP, real GDP and the GDP deflator in
2012 and 2013 from the preceding year.
Calculating the percentage change in nominal GDP:
Percentage change in nominal GDP in 2012 = [($400 – $200)/$200] × 100% = 100%.
Percentage change in nominal GDP in 2013 = [($800 – $400)/$400] × 100% = 100%.
Calculating the percentage change in real GDP:
Percentage change in real GDP in 2012 = [($400 – $200)/$200] × 100% = 100%.
Percentage change in real GDP in 2013 = [($400 – $400)/$400] × 100% = 0%.
Calculating the percentage change in GDP deflator:
Percentage change in the GDP deflator in 2012 = [(100 – 100)/100] × 100% = 0%.
Percentage change in the GDP deflator in 2013 = [(200 – 100)/100] × 100% = 100%.
Prices did not change from 2011 to 2012. Thus, the percentage change in the GDP
deflator is zero. Likewise, output levels did not change

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 C. Did the economic well-being rise more in 2012 or in 2013. Explain.

Economic well-being rose more in 2012 than in 2013, since real GDP rose in 2012
but not in 2013.

4. Consider an economy that produces only chocolate bars. In year 1, the quantity
produced is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and
the price is $5. In year 3, the quantity produced is 5 bars and the price is $6. Year 1
is the base year.

A. What is the nominal GDP for each of these three years?

Calculating Nominal GDP:
Year 1: (3 bars × $4) = $12
Year 2: (4 bars × $5) = $20
Year 3: (5 bars × $6) = $30

B. What is real GDP for each of these years?

Calculating Real GDP:
Year 1: (3 bars × $4) = $12
Year 2: (4 bars × $4) = $16
Year 3: (5 bars × $4) = $20

C. What is the GDP deflator for each of these years?

Calculating the GDP delator:
Year 1: $12/$12 × 100 = 100
Year 2: $20/$16 × 100 = 125
Year 3: $30/$20 × 100 = 150

D. What is the percentage growth rate of real GDP from year 2 to year 3?
The growth rate from Year 2 to Year 3 = (20 – 15)/16 × 100% = 4/16 × 100% = 25%
E. What is the inflation rate as measured by the GDP deflator from year 2 to year 3?
The inflation rate from Year 2 to Year 3 = (150 – 125)/125 × 100% = 25/125 × 100% =
20%.

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TRUE/FALSE
5. GDP is the market value of all final goods and services produced by a country’s citizens in a
given period of time.
ANS: F

6. GDP excludes the value of intermediate goods because their value is included in the value
of final goods.
ANS: T

7. GDP does not make adjustments for leisure time, environmental quality, or volunteer work.
ANS: T

MULTIPLE CHOICE QUESTIONS

8. Which of the following statements about nominal GDP and real GDP is correct?
a. Nominal GDP is a better gauge of economic well-being than real GDP.
b. Real GDP is a better gauge of economic well-being than nominal GDP.
c. Real GDP and nominal GDP are equally good measures of economic well-being.
d. Neither nominal nor real GDP provide a measure of economic well-being.
ANS: B

9. If nominal GDP is $12 trillion and real GDP is $10 trillion, then the GDP deflator is
a. 83.33, and this indicates that the price level has decreased by 16.67 percent since
the base year.
b. 83.33, and this indicates that the price level has increased by 83.33 percent since
the base year.
c. 120, and this indicates that the price level has increased by 20 percent since the
base year.
d. 120, and this indicates that the price level has increased by 120 percent since the
base year.
ANS: C

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10. Transactions involving items produced in the past, such as the sale of a 5-year-old
automobile by a used car dealership or the purchase of an antique rocking chair by a person at a
yard sale, are
a. included in current GDP because GDP measures the value of all goods and services
sold in the current year.
b. included in current GDP but valued at their original prices.
c. not included in current GDP because it is difficult to determine their value.
d. not included in current GDP because GDP only measures the value of goods and
services produced in the current year.
ANS: D

11. For the purpose of calculating GDP, investment is spending on

a. stocks, bonds, and other financial assets.
b. real estate and financial assets such as stocks and bonds.
c. capital equipment, inventories, and structures, including household purchases of new
housing.
d. capital equipment, inventories, and structures, excluding household purchases of new
housing.
ANS: C