Econ 231, Chapter 15: GDP and National Income

1. GDP is defined as a. the market value of all goods and services produced within a country in a given period of time. b. the market value of all goods and services produced by the citizens of a country, regardless of where they are living in a given period of time. c. the market value of all final goods and services produced within a country in a given period of time. d. the market value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.

2. Which of the following transactions adds to U.S. GDP for 2006? a. In 2006, Ashley sells a car that she bought in 2002 to William for $5,000. b. An American management consultant works in Mexico during the summer of 2006 and earns the equivalent of $30,000 during that time. c. When John and Jennifer were both single, they lived in separate apartments and each paid $750 in rent. John and Jennifer got married in 2006 and they bought a house that, according to reliable estimates, could be rented for $1,600 per month. d. None of the above transactions adds to GDP for 2006.

3. Goods that go into inventory and are not sold during the current period are a. counted as intermediate goods and so are not included in current period GDP. b. counted in current GDP only if the firm that produced them sells them to another firm. c. included in current period GDP as inventory investment. d. included in current period GDP as consumption.

4. Which of the following transactions adds to U.S. GDP for 2006? a. In 2006, Marvin Windows manufactures 20 windows that will eventually be installed in an office building in Minneapolis. The windows remain in Marvin’s inventory at the end of 2006. b. An Irish marketing consultant works in Boston during the summer of 2006 and earns $30,000 during that time. c. When John and Jennifer were both single, they lived in separate apartments and each paid $750 in rent. John and Jennifer got married in 2006 and they bought a house that, according to reliable estimates, could be rented for $1,600 per month. d. All of the above transactions adds to GDP for 2006.

5. Over the last few decades, Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself, has a. reduced measured GDP. b. not affected measured GDP. c. increased measured GDP by the full value of the restaurant meals.

6. Over time, people have come to rely more on market-produced goods and less on goods that they produce for themselves. For example, busy people with high incomes, rather than cleaning their own houses, hire people to clean their houses. By itself, this change has a. caused GDP to fall. b. not caused any change in GDP. c. caused GDP to rise. d. probably changed GDP, but in an uncertain direction; the direction of the change depends on the difference in the quality of the cleaning that has resulted.

7. One bag of flour is sold for $1.50 to a bakery, which uses the flour to bake bread that is sold for $4.00 to consumers. A second bag of flour is sold to a consumer in a grocery store for $2.00. Taking these three transactions into account, what is the effect on GDP? a. GDP increases by $1.50. b. GDP increases by $3.50. c. GDP increases by $6.00. d. GDP increases by $7.50.

8. A steel company sells some steel to a bicycle company for $100. The bicycle company uses the steel to produce a bicycle, which it sells for $200. Taken together, these two transactions contribute a. $100 to GDP. b. $200 to GDP. c. between $200 and $300 to GDP, depending on the profit earned by the bicycle company when it sold the bicycle. d. $300 to GDP.

9. Darla, a Canadian citizen, works only in the United States. The value that her labor contributes to U.S. output 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.

10. Tyler and Camille both live in Oklahoma. A new-car dealer in Oklahoma bought a new car from the manufacturer for $17,000 and sold it to Tyler for $20,000. Later that year, Tyler sold the car to Camille for $15,000. By how much did these transactions contribute to U.S. GDP for the year? a. $17,000 b. $20,000 c. $35,000 d. $52,000

11. Which of the following values would be reflected in U.S. GDP for 2006? a. the rent that John, an American citizen, would have paid on his home in New York in 2006 had he not owned that home b. the rent that Sarah, an American citizen, paid on her apartment in San Francisco in 2006 c. the value of the legal services provided by Carlos, an attorney and a Mexican citizen, who lived in Houston and practiced law there in 2006 d. All of the above are correct.

12. U.S. GDP and U.S. GNP are related as follows: a. GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad. b. GNP = GDP + Income earned by foreigners in the U.S. - Income earned by U.S. citizens abroad. c. GNP = GDP + Value of exported goods - Value of imported goods. d. GNP = GDP - Value of exported goods + Value of imported goods.

Use the following table to answer the following questions.

Table 15-1. The data pertain to the nation of Simplia for the year 2006.
|GDP |$110 |
|Income Earned by Citizens Abroad |$ 5 |
|Income Foreigners Earn here |$ 15 |
|Losses from Depreciation |$ 4 |
|Indirect Business Taxes |$ 6 |
|Business Subsidies |$ 2 |
|Corporate Income Taxes |$ 6 |
|Social Insurance Contributions |$ 10 |
|Transfer Payments to Households from Government |$ 15 |
|Personal Taxes |$ 30 |

13. Refer to Table 15-1. GNP for Simplia is a. $96. b. $100. c. $105. d. $110.

14. Refer to Table 15-1. The market value of all final goods and services produced within Simplia in 2006 is a. $96. b. $100. c. $105. d. $110.

15. Refer to Table 15-1. National income for this economy is a. $96. b. $92. c. $90. d. $88.

16. If a U.S. citizen buys a television made in Korea by a Korean firm, a. U.S. net exports decrease and U.S. GDP decreases. b. U.S. net exports are unaffected and U.S. GDP decreases. c. U.S. net exports are unaffected and U.S. GDP is unaffected. d. U.S. net exports decrease and U.S. GDP is unaffected.

17. Steph buys a designer dress produced by an American-owned fashion shop in France. As a result, U.S. consumption increases, U.S. net exports a. decrease, U.S. GDP is unaffected, and U.S. GNP increases. b. decrease, U.S. GDP increases, and U.S. GNP is unaffected. c. decrease, U.S. GNP increases, and French GDP is unaffected. d. are unaffected, U.S. GDP is unaffected, and French GDP increases.

18. A German citizen buys an automobile produced in the United States by a Japanese company. As a result, a. U.S. net exports increase, U.S. GNP and GDP are unaffected, Japanese GNP increases, German net exports decrease, and German GNP and GDP are unaffected. b. U.S. net exports, GNP, and GDP increase, Japanese GDP increases, German net exports decrease, and German GDP is unaffected. c. U.S. net exports and GDP increase, Japanese GNP increases, German net exports decrease, and German GDP and GNP are unaffected. d. U.S. net exports, GNP, and GDP are unaffected, Japanese GNP increases, German net exports decrease, and German GDP and GNP fall.

19. The U.S. government pays an economist at the U.S. Department of Commerce $50,000 in salary in 2006. The economist then retires. In 2007, the government pays him $30,000 in retirement benefits. Which of the following is correct? a. Each payment will be included in GDP as government purchases for the respective years. b. The 2006 payment is included in 2006 GDP as government purchases, but the 2007 payment is not included in 2007 GDP. c. The 2006 payment is included in 2006 GDP as government purchases, and the 2007 payment is included in 2007 GDP as government transfer payments. d. The 2006 payment is included in 2006 GDP as government purchases, and the 2007 payment is allocated to previous years' GDP according to the amount of work performed by the economist each year.

20. Transfer payments are a. included in GDP because they represent income to individuals. b. included in GDP because the income eventually will be spent on consumption. c. not included in GDP because they are not payments for currently produced goods or services. d. not included in GDP because taxes will have to be raised to pay for them.

21. Unemployment compensation is a. part of GDP because it represents income. b. part of GDP because the recipients must have worked in the past to qualify. c. not part of GDP because it is a transfer payment. d. not part of GDP because the payments reduce business profits.

22. In the United States in 2004, consumption represented approximately a. 40 percent of GDP. b. 50 percent of GDP. c. 60 percent of GDP. d. 70 percent of GDP.

23. For a certain economy in 2005, GDP was $2,000; investment was $400; government purchases were $300; and net exports were $70. It follows that consumption was a. $1,370. b. $1,330. c. $1,230. d. 60 percent of GDP.

24. In a certain economy in 2005, households spent $1,000 on goods and services; purchases of capital equipment, inventories, and structures amounted to $350; government spent $450 on goods and services; and the value of imports exceeded the value of exports by $50. It follows that 2005 GDP for this economy was a. $1,750. b. $1,850. c. $1,950. d. $2,100

25. In a given year an economy has consumption of $3,000, investment of $2,000, government purchases of $1,500, exports of $500, imports of $600, taxes of $1200, transfer payments of $400, and depreciation of $300. This economy’s GDP is a. $6,400. b. $7,000. c. $7,600. d. $8,900.

26. Which of the following statements about GDP is correct? a. Nominal GDP values production at current prices, whereas real GDP values production at constant prices. b. Nominal GDP values production at constant prices, whereas real GDP values production at current prices. c. Nominal GDP values production at market prices, whereas real GDP values production at the cost of the resources used in the production process. d. Nominal GDP consistently underestimates the value of production, whereas real GDP consistently overestimates the value of production.

27. If real GDP doubles and the GDP deflator doubles, then nominal GDP a. remains constant. b. doubles. c. triples. d. quadruples.

Table 15-2. The information in the table pertains to the country of Ophir.

|Year |Nominal GDP |GDP Deflator |
|2004 |$4000 |100 |
|2005 |$4100 |105 |
|2006 |$4200 |110 |

28. Refer to Table 15-2. From this information we can conclude that a. real GDP was higher in 2006 than in 2005, and real GDP was higher in 2005 than in 2004. b. real GDP was higher in 2005 than in 2004, and real GDP was higher in 2005 than in 2006. c. real GDP was higher in 2004 than in 2005, and real GDP was higher in 2005 than in 2006. d. real GDP was higher in 2004 than in 2006, and real GDP was higher in 2005 than in 2004.

Table 15-3

|Prices and Quantities |
|Year |Price of |Quantity of |Price of |Quantity of |
| |Sandwiches |Sandwiches |Magazines |Magazines |
|2006 |$4.00 |100 |$2.00 |180 |
|2007 |$5.00 |120 |$2.50 |200 |
|2008 |$6.00 |150 |$3.50 |200 |

29. Refer to Table 15-3. Nominal GDP for 2007 is a. $900. b. $1,100. c. $1,250. d. $1,350.

30. Refer to Table 15-3. Using 2006 as the base year, for 2007, a. real GDP is $880 and the GDP deflator is 80. b. real GDP is $880 and the GDP deflator is 125. c. real GDP is $950 and the GDP deflator is 95. d. real GDP is $950 and the GDP deflator is 116.

31. Refer to Table 15-3. Using 2007 as the base year, for 2006, a. real GDP is $760 and the GDP deflator is 100. b. real GDP is $760 and the GDP deflator is 125. c. real GDP is $880 and the GDP deflator is 80. d. real GDP is $950 and the GDP deflator is 80.

ANSWERS 1. c 2. c 3. c 4. d 5. c 6. c 7. c 8. b 9. b 10. b 11. d 12. a 13. b 14. d 15. b 16. d 17. a 18. c 19. b 20. c 21. c 22. d 23. c 24. a 25. a 26. a 27. d 28. c 29. b 30. b 31. d