Deck 11: Gross Domestic Product

Question 1

The lower portion of the circular flow model contains factor markets in which households provide:

A) goods and services.
B) savings, spending, and investment.
C) natural resources, labor, and capital.
D) output of all final goods and services produced.

Answer 1

C

Question 2

Which of the following purchases would be counted as a final good in the GDP calculation?

A) A family's purchase of a used car.
B) A speculator's purchase of 100 shares of Apple Computer stock.
C) A deli's purchase of bread for making its sandwiches.
D) A business's purchase of new office equipment.

Answer 2

D

Question 3

The lower portion of the circular flow model contains factor markets in which households receive:

A) output of all final goods and services produced.
B) savings, spending, and investment.
C) goods and services.
D) wages, rents, interest, and profits.

Answer 3

D

Question 4

Gross domestic product (GDP) includes:

A) intermediate as well as final goods.
B) foreign goods as well as domestically produced goods.
C) used goods sold in the current time period.
D) only final goods and services.

Question 5

Which of the following expenditures would not be included in GDP?

A) Purchase of a new lawnmower.
B) Purchase of a silver cup previously sold new in 1950.
C) Purchase of a ticket to the latest movie.
D) Purchase of a landscaping service.

Question 6

Based on the circular flow model, goods and services flow from:

A) households to businesses in product markets.
B) businesses to households in product markets.
C) households to businesses in factor markets.
D) businesses to households in factor markets.

Question 7

The circular flow of economic activity is a model of the:

A) flow of goods, resources, payments, and expenditures between the sectors of the economy.
B) influence of government on business behavior.
C) influence of business on consumers.
D) role of unions and government in the economy.

Question 8

Resources that flow through the circular flow model include all of the following except :

A) land.
B) labor.
C) capital.
D) final goods.

Question 9

Which one of the following is an example of the circular flow model and shows the interdependence of households and firms?

A) Households demand their resources from the firms in the factor markets and, in turn, supply in the product market the goods and services produced by firms.
B) The firms go to the resource market to supply resources that households demand and, in turn, provide households with the goods and services produced for the product markets.
C) Households supply their resources to the firms in the factor markets and, in turn, demand in the product market the goods and services produced by the firms.
D) The firms in the factor markets pay to households in the form of wages, interest, rent and profit ⎯ for resources demanded.

Question 10

The circular flow model assumes:

A) businesses and households own the factors of production.
B) businesses own the factors of production.
C) government owns the factors of production.
D) households own the factors of production.

Question 11

Which of the following expenditures would be included in GDP for this year?

A) The purchase of a new car.
B) The purchase of a new tire by General Motors for a new car.
C) The purchase of a used car.
D) The purchase of an intermediate good.

Question 12

Which one of the following transactions would be included in GDP?

A) Ms. Kim pays $50 for a used picture frame at a neighborhood garage sale.
B) Mr. Doe donates $500 to his town's junior college scholarship fund.
C) Ms. Bartolini pays $500 to fix the front end of her car damaged in a recent accident.
D) Ms. Smith pays $5,000 to purchase 100 shares of Microsoft stock.

Question 13

Based on the circular flow model, money flows from households to businesses in:

A) factor markets.
B) product markets.
C) neither factor nor product markets.
D) both factor and product markets.

Question 14

GDP:

A) is the dollar value of all the final goods and services produced within the borders of a nation.
B) includes intermediate and final goods and services.
C) equals inflation .
D) is a less-than-perfect measure of social well-being because it does not include exports and imports.

Question 15

GDP is a measure of:

A) domestic production.
B) changes in the general level of prices.
C) material well-being.
D) social welfare.

Question 16

Payments to households not in exchange for goods and services currently produced are:

A) transfer payments.
B) government purchases.
C) consumption expenditures.
D) investment expenditures.

Question 17

Which of the following market transactions of final goods and services are excluded from the computation of U.S. GDP?

A) Purchases of products such as wine, beer, hard liquor, and cigarettes.
B) Secondhand transactions, such as when a used car is sold.
C) New purchase that a resident of one state makes in a different state.
D) Purchases of necessities such as groceries and rent.

Question 18

Activities that are directly included in GDP accounts include:

A) the value of housework done by householders.
B) the selling of illegal drugs.
C) unreported labor in sweatshops.
D) buying a ticket to a Yankees-Red Sox game on your day off.

Question 19

Intermediate goods are goods and services used:

A) by the ultimate user.
B) by state and local governments.
C) as inputs.
D) both as inputs and final goods.

Question 20

Which of the following activities would be calculated as part of GDP accounts?

A) Drug trafficking.
B) Money laundry.
C) Illegal prostitution.
D) Purchasing plastic surgery.

Question 21

Which one of the following would count as investment in the GDP accounts?

A) Purchase of a new airplane by an airline.
B) Purchase of a U.S. government bond.
C) Purchase of 100 shares of Wal-Mart stock.
D) Purchase of an existing house.

Question 22

If you buy a book of U.S. postage stamps to use to mail love letters to your sweetheart, the purchase is considered part of:

A) C.
B) I.
C) G.
D) X.

Question 23

If net exports are a negative number, then:

A) we are not buying enough exports.
B) we are exporting less than we are importing.
C) GDP will underestimated when measured using the expenditure approach.
D) we are exporting more than we are importing.

Question 24

Which of the following would not be included in the government consumption expenditures and gross investment (G) category of GDP?

A) The payments made to Social Security recipients.
B) The expenditures made to repair a highway.
C) The spending for professors at state universities.
D) The purchase of new china for White House functions.

Question 25

Gross private domestic investment includes business:

A) purchases of capital goods, all new construction, and purchases of consumer durable goods.
B) purchases of capital goods, all new construction, and inventory investment.
C) purchases of capital goods, all new commercial construction, and inventory investment.
D) purchases of all types of durable goods, all new construction, and inventory investment.

Question 26

Which of the following would be included in the government expenditures component of GDP?

A) The export of 100 fighter jets to Japan
B) Construction costs of a new public school building
C) Food stamps used by the Smith family
D) A $1,000 check issued by the federal government as part of the Pell Grant program to help college students pay for school

Question 27

Which one of the following is not a component of GDP, as measured using the expenditure approach?

A) personal consumption
B) exports
C) interest
D) government spending

Question 28

Exhibit 11-11 GDP data (billions of dollars) $$\begin{array} { | l | r | } \hline \text { Personal consumption expenditures } & \$ 4,750 \\\hline \text { Exports } & 810 \\\hline \text { Government spending } & 1,400 \\\hline \text { Social Security taxes } & 600 \\\hline \text { Depreciation } & 450 \\\hline \text { Indirect business taxes } & 550 \\\hline \text { Imports } & 850 \\\hline \text { Gross private domestic investment } & 900 \\\hline \text { Corporate income taxes } & 200 \\\hline \text { Personal taxes } & 800 \\\hline \text { Corporate profits } & 50 \\\hline \text { Transfer payments } & 700 \\\hline\end{array}$$ In Exhibit 11-11, and using the expenditures approach, gross domestic product (GDP) equals:

A) $7,010 billion.
B) $10,360 billion.
C) $9,660 billion.
D) $7,860 billion.

Question 29

Which one of the following statements is true ?

A) Money flows from households to firms for resources.
B) Money flows from households to foreign economies for exports.
C) Money flows from government to firms for resources.
D) Money flows from firms to households for resources.

Question 30

If exports rise and imports fall, then:

A) GDP will increase.
B) GDP will decrease.
C) GDP may remain unchanged.
D) net exports will fall.

Question 31

Exhibit 11-10 GDP data (billions of dollars) $$\begin{array} { | l | r | } \hline \text { Indirect business taxes } & \$ 600 \\\hline \text { Depreciation } & 950 \\\hline \text { Change in business inventories } & 50 \\\hline \text { Compensation of employees } & 5,400 \\\hline \text { Corporate profits } & 700 \\\hline \text { Durable goods } & 600 \\\hline \text { Exports } & 100 \\\hline \text { Social Security taxes } & 360 \\\hline \text { Transfer payments } & 300 \\\hline \text { Fixed investment } & 950 \\\hline \text { Government spending } & 800 \\\hline \text { Imports } & 150 \\\hline \text { Net interest } & 500 \\\hline \text { Nondurable goods } & 2,000 \\\hline \text { Personal taxes } & 1,000 \\\hline \text { Rental income } & 200 \\\hline \text { Services } & 4,000 \\\hline\end{array}$$ In Exhibit 11-10, and using the expenditures approach, compute net exports (X-M). Which of the following is correct ?

A) $500 billion.
B) $150 billion.
C) $100 billion.
D) -$50 billion.

Question 32

Durable and nondurable goods and services lumped together in the expenditure approach to measuring GDP are called:

A) Personal consumption.
B) Gross private domestic investment.
C) Government spending.
D) Inventory.

Question 33

New residential housing is counted in GDP as a(n):

A) durable consumption good.
B) household durable good.
C) investment good.
D) inventory expansion.

Question 34

The largest component of GDP is:

A) personal consumption expenditures.
B) government spending.
C) durable goods.
D) net exports.

Question 35

Which of the following would be classified as a personal consumption expenditure?

A) Your purchase of this economics course.
B) Your purchase of a newly constructed house
C) Your purchase of a preowned house.
D) Your purchase of one share of Microsoft stock.

Question 36

Gross private domestic investment does not include:

A) spending for new houses.
B) spending to build up inventories.
C) unintentional inventory investment.
D) spending on employee salaries.

Question 37

Exhibit 11-7 GDP data (billions of dollars) $$\begin{array} { | l | r | } \hline \text { Personal consumption expenditures } & \$ 5,207 \\\hline \text { Interest } & 425 \\\hline \text { Corporate profits } & 735 \\\hline \text { Government spending } & 1,406 \\\hline \text { Depreciation } & 830 \\\hline \text { Rental income } & 146 \\\hline \text { Gross private domestic investment } & 1,116 \\\hline \text { Compensation of employees } & 4,426 \\\hline \text { Exports } & 870 \\\hline \text { Imports } & 965 \\\hline \text { Indirect business taxes } & 553 \\\hline \text { Proprietors' income } & 520 \\\hline \text { Personal taxes } & 886 \\\hline \text { Social Security taxes } & 432 \\\hline \text { Transfer payments } & 376 \\\hline\end{array}$$ In Exhibit 11-7, and using the expenditures approach, gross domestic product (GDP) is:

A) $6,807 billion.
B) $7,082 billion.
C) $7,634 billion.
D) $7,637 billion.

Question 38

Your purchase of a Gucci purse made in Italy would be classified as:

A) an export.
B) an investment good.
C) a durable good.
D) an import.

Question 39

Exhibit 11-1 Use the information below to answer the following question(s). $$\begin{array} { | l | c | } \hline \text { National income account } & \begin{array} { c } \text { Billions of } \\\text { dollars }\end{array} \\\hline \text { Personal consumption expenditures } & \$ 900 \\\text { Personal taxes } & 180 \\\text { Government consumption and gross investment } & 300 \\\text { Interest income } & 60 \\\text { Exports } & 40 \\\text { Imports } & 75 \\\text { Depreciation } & 60 \\\text { Gross private domestic investment } & 200 \\\hline\end{array}$$ Refer to Exhibit 11-1. What is this country's gross domestic product?

A) $1,225.
B) $1,305.
C) $1,365.
D) $1,440.

Question 40

Using the expenditure approach, GDP equals:

A) C + I + G + (X − M).
B) C + I + G + (X + M).
C) C + I − G + (X − M).
D) C + I + G − (X − M).

Question 41

Discuss the components of GDP using the expenditure approach.

Question 42

GDP does not count:

A) the estimated value of homemaker production.
B) state and local government purchases.
C) spending for new homes.
D) changes in inventories.

Question 43

Which of the following is the most likely side effect of an increase in the relative size of the underground economy with the passage of time?

A) The growth rate of real GDP will tend to understate the growth rate of total output.
B) The growth rate of real GDP will tend to overstate the growth rate of total output.
C) The GDP deflator will tend to overstate any increase in inflation.
D) The GDP deflator will tend to understate any increase in inflation.

Question 44

Because GDP does not account for improvements in the quality of goods, the GDP calculation:

A) tends to overstate the true value of output in the United States.
B) tends to understate the true value of output in the United States.
C) provides an accurate value of output in the United States.
D) provides the best measure of output in the United States.

Question 45

GDP includes:

A) the negative attributes from erosion and deforested landscape.
B) all quality improvements resulting from higher quality goods replacing inferior goods.
C) the cleaning-up expenses associated with pollution.
D) the value of leisure time.

Question 46

Which of the following statements is true ?

A) The inclusion of intermediate goods and services into GDP calculations would underestimate our nation's production level.
B) Nominal GDP + Inflation - Unemployment = Real GDP .
C) Real GDP has been adjusted for changes in the general level of prices due to inflation.
D) Real GDP equals nominal GDP multiplied by the GDP deflator.

Question 47

In an economy with persistent inflation,

A) real GDP will grow faster than nominal GDP.
B) nominal GDP will grow faster than real GDP.
C) nominal and real GDP will grow at the same rate.
D) nominal and real GDP will both fall.

Question 48

Increased production, but not increased inflation, will result in higher:

A) nominal GDP.
B) money GDP.
C) real GDP.
D) current dollar GDP.

Question 49

Real GDP means GDP:

A) valued at prices in a base year.
B) that does not change from year to year.
C) corrected for changes in quality.
D) valued at prices at which goods are actually sold.

Question 50

If an artisan sells handmade jewelry at a craft fair

A) and does not report the income earned to the Internal Revenue Service, GDP is understated.
B) and does not report the income earned to the Internal Revenue Service, GDP is overstated.
C) and reports the income earned to the Internal Revenue Service, GDP is understated.
D) and reports the income earned to the Internal Revenue Service, GDP is overstated.

Question 51

GDP overstates the productive capacity of a country when:

A) economic bads like pollution are produced and then must be cleaned up.
B) there is a sizable underground economy.
C) nonmarket production represents a large portion of the economy.
D) working conditions improve, allowing jobs to be completed safer and faster.

Question 52

The equation for determining real GDP for year X is:

A) $\frac{\text {nominal GDP for year \( \mathrm{X} \) }}{\text {average nominal GDP }}$
B) $\frac{\text {nominal GDP for year \( \mathrm{X} \) }}{\text { GDP for year \( \mathrm{X} \)}}-100$
C) $\frac{\text {nominal GDP for year \( \mathrm{X} \) }}{\text { GDP chain price index for year } \mathrm{X}}\times 100$
D) $\frac{\text { nominal GDP for year \( \mathrm{X} \) }}{\text { average family income}}\times100$

Question 53

Which of the following is a shortcoming of GDP?

A) GDP measures used goods and services.
B) GDP includes changes in inventories.
C) GDP includes the value of net exports.
D) GDP does not make an allowance for leisure time.

Question 54

Explain why GDP was never intended to be a measure of social well being.

Question 55

Which of the following is a shortcoming of GDP?

A) GDP excludes changes in inventories.
B) GDP includes an estimate of illegal transactions.
C) GDP excludes nonmarket transactions.
D) GDP excludes business investment spending.

Question 56

GDP underestimates our economic well-being:

A) because it includes the value of work done by illegal immigrants.
B) because it includes the value of work done by nannies.
C) because it ignores leisure.
D) because it includes the value of work done by householders.

Question 57

If a homeowner sells a kitchen table and chairs that she no longer wants to use and does not report the income earned from the sale to the Internal Revenue Service, the value of GDP is

A) understated because this transaction took place in the underground economy.
B) overstated because the sale of the furniture is counted twice in GDP calculations.
C) unaffected by this transaction because the table and chairs were already counted in GDP as final goods when the homeowner bought them new.
D) understated because this purchase was a nonmarket transaction.

Question 58

In recent years, people have benefited from greater amounts of leisure time. This trend:

A) has caused GDP to rise.
B) has caused GDP to fall.
C) made GDP fluctuate randomly.
D) is not accounted for in GDP.

Question 59

Which of the following is a shortcoming of GDP?

A) GDP measures nonmarket transactions.
B) GDP includes an estimate of illegal transactions.
C) GDP includes an estimate of the value of household services.
D) GDP does not account for the distribution of consumption across a country's population.

Question 60

If the underground economy is sizable, then GDP will:

A) understate the economy's performance.
B) overstate the economy's performance.
C) fluctuate unpredictably.
D) accurately reflect this subterranean activity.

Question 61

In a given year, U.S. nominal GDP was $5,744 billion and the GDP chain price index is 93.6. Real GDP is:

A) $6,137 billion.
B) $5,376 billion.
C) $6,000 billion.
D) $6,376 billion.

Question 62

Suppose in a given year, GDP was $7,242 billion and the GDP chain price index for that year is 117.5. Real GDP is:

A) $5,488 billion.
B) $6,163 billion.
C) $6,740 billion.
D) $7,789 billion.

Question 63

Why is it important to distinguish nominal GDP from real GDP?

Question 64

Exhibit 11-6 Use the table below to answer the following question(s). $$\begin{array} { | l | c | c | } \hline \text { Year } & \begin{array} { c } \text { Nominal GDP } \\\text { (billions) }\end{array} & \begin{array} { c } \text { GDP } \\\text { deflator }\end{array} \\\hline \text { Year 1 } & 600 & 100.0 \\\text { Year 2 } & 1,000 & 133.3 \\\hline\end{array}$$ Refer to Exhibit 11-6. Measured in terms of Year 1 prices, real GDP in Year 2 was:

A) 600.
B) 750.
C) 900.
D) 1,333.

Question 65

In a given year, U.S. nominal GDP was $2,784 billion and the GDP chain price index for that year is 60.4. Real GDP is:

A) $1,682 billion.
B) $4,609 billion.
C) $3,889 billion.
D) $4,000 billion.

Question 66

Why is it important to use real GDP rather than nominal GDP figures when making comparisons of output across time periods?

A) The real GDP figures are a better measure of changes in the general level of prices.
B) The real figures will reflect changes in the quantity of output and not changes in the general level of prices.
C) The real figures will reflect changes in the general level of prices as well as changes in the quantity of output.
D) The real GDP figures adjust for changes in the level of employment.

Question 67

Exhibit 11-6 Use the table below to answer the following question(s). $$\begin{array} { | l | c | c | } \hline \text { Year } & \begin{array} { c } \text { Nominal GDP } \\\text { (billions) }\end{array} & \begin{array} { c } \text { GDP } \\\text { deflator }\end{array} \\\hline \text { Year 1 } & 600 & 100.0 \\\text { Year 2 } & 1,000 & 133.3 \\\hline\end{array}$$ Refer to Exhibit 11-6. Between Year 1 and Year 2, the general level of prices increased by approximately:

A) 16.7 percent.
B) 33.3 percent.
C) 66.7 percent.
D) 133.3 percent.