56) Wages paid to teachers, police personnel, and postal workers are not transfer payments
because they are payments for services and not simply “transfers” of money.
57) A trade surplus occurs when a country’s exports exceed that country’s imports.
58) Net exports are total imports minus total exports.
59) We ADD to the GDP when goods produced abroad are sold in the United States.
60) Define GDP.
61) Explain why only final goods are included in GDP.
62) List and describe the four components of GDP.
63) Define transfer payments and explain why they are not included in the government purchases
section of the GDP accounts.
11.3 The Income Approach: Measuring a Nation’s Macroeconomic Activity Using National
Income
1) Income that flows to the private sector for services and production, is called
A) net income.
B) national income.
C) deficit income.
D) derived income.
2) When gross domestic product (GDP) is adjusted by adding any income earned abroad by U.S.
firms or residents which is sent back to the United States and by subtracting any income earned
in the United States by non-U.S. corporations or foreign nationals which is sent back to their
home countries, it is called
A) depreciation.
B) subsidized income.
C) international GDP.
D) gross national product (GNP).
3) Depreciation is subtracted from GNP to determine
A) net income.
B) net national product (NNP).
C) net GDP.
D) net imbalance on exports.
4) Which of the following is a category of national income?
A) net interest
B) corporate profits
C) rental income
D) all of the above
5) Which of the following is the largest component of national income?
A) net interest
B) corporate profits
C) rental income
D) compensation of employees by firms
6) Which of the following is NOT a component of value added of a firm?
A) expenditures on intermediate goods
B) profits
C) wages
D) interest
7) The amount of income that households keep after paying taxes is
A) national income.
B) personal income.
C) personal disposable income.
D) value added income.
8) Personal income and personal disposable income refer to payments ultimately flowing to
A) firms.
B) households.
C) governments.
D) foreigners.
9) A firm’s value added can be measured as the value of its
A) profits.
B) purchases of inputs from other firms.
C) total sales.
D) total sales, less purchases from other firms.
10) If Cassie’s Coffee House purchases 42 cents worth of ingredients and spends 28 cents on
wages per cup of coffee to produce an 89 cent cup of coffee, then Cassie’s Coffee House’s value
added per cup of coffee is
A) 19 cents.
B) 28 cents.
C) 47 cents.
D) 61 cents.
11) If Cassie’s Coffee House purchases 33 cents worth of ingredients and spends 36 cents on
wages per cup of coffee to produce an 89 cent cup of coffee, then Cassie’s Coffee House’s
contribution to GDP is ________ per cup of coffee.
A) 20 cents
B) 33 cents
C) 36 cents
D) 56 cents
Recall the Application about the size of Wal-Mart to answer the following question(s).
During 2008, Wal-Mart’s sales were approximately $374 billion, or roughly 2.6% of U.S.
GDP, and its cost of sales was $286 billion.
12) Recall the application. In listing both the amount and cost of Wal-Mart’s 2008 sales, this
Application is addressing the economic concept of
A) real versus nominal GDP.
B) GDP as a measure of welfare.
C) chain-weighted indexes.
D) value added.
13) Recall the application. Why is the value of Wal-Mart’s 2008 sales NOT an accurate
measurement of its actual sales impact on the U.S. economy?
A) The sales figure did not account for chain-weighted inflation measurements.
B) The sales figure includes the value of purchases from other firms.
C) The sales figure did not take into account the recession of 2008.
D) The sales figure was in nominal, not real, dollars.
14) Recall the application. By using a value-added approach to measure Wal-Mart’s sales impact
on the economy, we are
A) using a chain-weighted index.
B) avoiding double-counting.
C) including GDP as a measure of welfare.
D) excluding the net foreign sector.
15) Recall the application. What was the approximate value of Wal-Mart’s value added in 2008?
A) $88 billion
B) $ 286 billion
C) $ 374 billion
D) $ 661 billion
16) In the expanded circular flow diagram, the government supplies
A) goods and services to the product market.
B) factors of production to the factor market.
C) goods and services to households.
D) factors of production to firms.
17) In the expanded circular flow diagram, the rest of the world interacts directly with
A) households.
B) firms.
C) product markets.
D) factor markets.
18) National income is the income that individuals and firms earn from their production.
19) Personal disposable income is pre-tax income that flows directly to households.
20) Compensation of employees is the largest component of national income.
21) Explain the difference between U.S. GDP and U.S. GNP.
11.4 A Closer Examination of Nominal and Real GDP
1) If real GDP was 100 in 2011 and 104.4 in 2012, the growth rate of real GDP between 2011
and 2012 was
A) 2.2%.
B) 4.4%.
C) 100%.
D) 102.2%.
2) If the economy grew at 7% from 2011 to 2012 and real GDP was 400 in 2011, what was real
GDP in 2012?
A) 393
B) 400
C) 407
D) 428
3) Suppose that nominal GDP in year 1 is 200 and nominal GDP in year 2 is 242. Assume that
inflation is 10% per year. How fast did the economy grow between these two years?
A) 10%
B) 12%
C) 21%
D) 42%
Use the following information to answer the next several questions:
Scenario 1: Imagine that an economy produces two goods, flashlights and fishing lures. In 2011,
the economy produced 70 flashlights and 40 fishing lures, and the prices of flashlights and
fishing lures were $5 and $12, respectively. In 2012, the economy produced 85 flashlights and 50
fishing lures, and the prices of flashlights and fishing lures were $7 and $15, respectively.
4) Based on the information in Scenario 1, nominal GDP in 2011 in this economy was
A) $830.
B) $1,025.
C) $1,090.
D) $1,345.
5) Based on the information in Scenario 1, nominal GDP in 2012 in this economy was
A) $830.
B) $1,025.
C) $1,090.
D) $1,345.
6) Based on the information in Scenario 1, real GDP in 2012 (in 2011 dollars) in this economy
was
A) $830.
B) $1,025.
C) $1,090.
D) $1,345.
7) Based on the information in Scenario 1, nominal GDP grew by about ________% from 2011
to 2012.
A) 23
B) 31
C) 62
D) 162
8) Based on the information in Scenario 1, real GDP grew by about ________% from 2011 to
2012.
A) 23
B) 31
C) 62
D) 162
9) When GDP is measured in “current prices” it is known as the
A) real GDP.
B) nominal GDP.
C) real GNP.
D) nominal GNP.
10) When the GDP is measured using “adjustments for price changes” it is known as the
A) real GDP.
B) nominal GDP.
C) real GNP.
D) nominal GNP.
11) A chain-weighted index
A) is used to understate the rate of inflation.
B) uses neighboring years’ data to calculate changes in nominal GDP.
C) calculates changes in prices by using an average of base years from neighboring years to
obtain a more accurate measure of real GDP growth.
D) is a useful tool for determining which fence to purchase.
12) What is the chain-weighted price index for GDP in the base year?
A) 0
B) 1
C) 100
D) The answer depends on the price index for the current year.