Economics Chapter 7 B—Taking the Nation’s Economic Pulse
MULTIPLE CHOICE
188. Accurate measurement of GDP is important to business decision-makers because this information will
help them better determine the
a.
general happiness of a country’s citizens.
b.
course of the economy and the direction of demand for their products.
c.
economic well-being of a particular group within a country.
d.
amount of leisure time available and the quality of life in a country.
189. Which of the following would increase U.S. GDP?
a.
Ford Motor Company begins to produce and sell cars in China.
b.
Mercedes-Benz begins to produce and sell cars in Mississippi.
c.
An American investor buys 100 shares of Ford stock.
d.
An American investor purchases 100 shares of Mercedes-Benz stock.
190. As per capita GDP has risen in the United States and other countries,
a.
life expectancy and leisure time have also risen and infant mortality and illiteracy have
gone down..
b.
life expectancy has risen but leisure time has gone down, while infant mortality and
illiteracy have remained the same.
c.
various quality of life variables have been unaffected.
d.
most quality of life variables such as life expectancy and expenditures on leisure time
activities have fallen.
191. National income is
a.
personal income of individuals minus the taxes they pay.
b.
gross national product minus depreciation.
c.
employee compensation, self-employment income, interest, rents, plus corporate profits.
d.
consumption, investment, government expenditures, and net exports.
192. Economists generally use GDP to measure a nation’s total output because it is
a.
equal to the sales value of all transactions conducted during a period and thus can be easily
calculated.
b.
the best available measure of the true costs of producing consumer goods.
c.
unaffected by changes in the prices of products over time.
d.
a relatively reliable measure of the value of all final product goods and services produced
during a specific time period.
193. Per capita GDP is
a.
real GDP divided by the GDP deflator
b.
a measure of income per person
c.
a measure of resources available to each person
d.
an indicator of the overall production of a government
194. Your father tells you he earned $3.00 per hour when he was 16 in 1977; you remember making $6.00
per hour when you were 16 in 1999. Given that the CPI was 36.7 in 1977 and 166.1 in 1999, which of
the following is the 1999 real equivalent of your father’s hourly earnings when he was 16?
a.
$4.48
b.
$6.78
c.
$13.58
d.
$15.01
195. The dollar value of GDP increased approximately 4 percent during the year, but real GDP fell 2
percent. Which of the following best explains this data?
a.
The real capacity of the economy increased more rapidly than money output.
b.
In the international sector, there was a balance of trade deficit of approximately 2 percent
of GDP.
c.
The inflation rate was approximately 6 percent during the year.
d.
The general level of prices rose approximately 2 percent.
196. Which of the following accurately indicates how the recent outbreaks of terrorism have influenced the
GDP of western nations?
a.
Additional expenditures on security designed to protect individuals from terrorist attacks
are subtracted from GDP.
b.
Additional expenditures on security designed to protect individuals from terrorist attacks
are added to GDP as part of output.
c.
Since expenditures on the prevention of terrorism do not contribute to the well-being of
individuals, they exert no impact on GDP.
d.
Since terrorism is merely a redistribution of output, expenditures on the prevention of
terrorism do not contribute to GDP.
197. If the GDP deflator in 2009 was 120 compared to a value of 100 during the 2004 base year, this would
indicate that
a.
the inflation rate during 2009 was 20 percent.
b.
the general level of prices during 2009 was 20 percent higher than during 2004.
c.
the inflation rate during 2009 was 120 percent.
d.
real GDP was 20 percent higher in 2009 than 2004.
198. Use the table below to choose the correct answer.
Personal consumption expenditures
$300
Government consumption and gross investment
115
Rent income
75
Net investment expenditures
100
Gross imports
15
Personal savings
125
Gross exports
10
Depreciation
50
Gross domestic product equals
a.
$550.
b.
$510.
c.
$595.
d.
$610.
199. Which of the following would be counted in the calculation of GDP?
a.
the sale of a rare, old coin to a coin collector
b.
the damage to a house caused by a hurricane
c.
the brokerage commission from the sale of 100 shares of Microsoft stock
d.
the sale of cocaine in the black market
200. How much would be added to this year’s GDP if you sold your four-year-old automobile for $4,000
and purchased a two-year-old model from an acquaintance for $10,000.
a.
nothing
b.
$6,000
c.
$10,000
d.
$14,000
201. If on-the-job working conditions have improved over time,
a.
real GDP will understate the growth rate of real income.
b.
real GDP will overstate the growth rate of real income.
c.
the GDP deflator will overestimate inflation.
d.
real GDP will overstate the growth rate of real income, and the GDP deflator will
understate inflation.
202. Assume that between 1999 and 2009 nominal GDP increased from $7 trillion to $12 trillion and that
the GDP deflator rose from 100 to 150. Which of the following expresses GDP for 2009 in terms of
1999 prices?
a.
$7.5 trillion
b.
$8.0 trillion
c.
$9.0 trillion
d.
$18.0 trillion
ESSAY
203. Answer the following questions:
a.
What does GDP measure, and why is it a useful tool for economists, business decision makers,
and government policy makers?
b.
Explain at least two important things GDP does not measure.
forecast the economy.
nature.
204. Explain the two approaches to calculating GDP.
ANS:
205. What is the difference between real and nominal GDP? If the president of the United States (or your
instructor) asked you to evaluate the economy over the past five years, which one would you use and
why?
206. The consumer price index is calculated using a fixed basket of goods. Will this always give an
accurate representation of the changing cost of living to consumers? Why or why not?
207. Answer the following questions:
a.
In 2004, four major hurricanes hit Florida. Explain how this destruction of property, and the
rebuilding that went on afterward, affected GDP.
b.
Explain how GDP has trouble accounting for other parts of the economy as well.
can actually end up increasing GDP.
economy.
208. Indicate whether the following transactions would be included in GDP. If they are included, indicate
which component (consumption, investment, government consumption and gross investment, or net
exports) of GDP would be affected.
a.
A Czech student attending school in Florida takes a summer job as a lifeguard.
b.
A New York company buys welding equipment from a St. Louis firm to help it build jet
fighters.
c.
The IRS purchases a new computer from the GATS computer company (an American-owned
business producing and operating in Germany) that will allow it to better detect income tax
evasion.
a.
This counts as production of consumption services (life saving) in GDP.
b.
This counts as an investment expenditure in GDP.
c.
This counts as government gross investment in GNP but does not affect GDP.
209. Nominal gross domestic product for the United States was $7,661.6 billion in 1996 and $8,110.9
billion in 1997. The GDP deflator was 109.5 in 1996 and 111.6 in 1997.
a.
What was the 1997 real GDP expressed in 1996 prices?
b.
What were the 1996 and 1997 GDPs expressed in base-year prices?
c.
What was the percent change in the nominal GDP between 1996 and 1997?
d.
What was the percent change in real GDP between 1996 and 1997?
e.
What was inflation between 1996 and 1997?
a.
$7,958.3 billion
b.
$6,996.9 billion; $7,267.8 billion
c.
5.86 percent
d.
3.87 percent
e.
1.92 percent
210. Your grandfather tells you that he earned $.50 per hour at his job when he was a boy in 1929.
a.
Given that the CPI was 17.1 in 1929 and 184.0 in 2003, how much would you have to make in
2003 to have the same real hourly wage?
b.
You made $5.50 an hour working during 2003. Were you better off than your grandfather in
terms of purchasing power? Explain.
c.
Your grandfather also tells you that a soda cost $.05 in 1929, and you know a soda cost $.55 in
2003. You decide to use the price of a soda as the price index. How much would the 2003
“soda equivalent” of $.50 per hour in 1929 be?
a.
$5.38
b.
Yes, $5.50 had more purchasing power than $.50 did in 1929.
$5.50 in 2003 would buy the same number of sodas (10) that $.50 would have in 1929.
211. Answer the following questions:
a.
What is the difference between gross domestic product and gross national product?
b.
Give an example of a transaction that would be counted in GDP but not in GNP.
c.
Give an example of a transaction that would be counted in GNP but not GDP.
contribution to domestic output.
b.
the production of a good or service by a foreign citizen within the domestic borders
212. Discuss the problems with GDP as a measure of a country’s current production and income.
213. What is meant by a final good or service as opposed to an intermediate good or service? Why are only
final goods and services included in the calculation of GDP?
ANS:
214. Determine whether each of the following transactions will be counted in the 2005 GDP of the United
States. If the transaction is counted, identify which expenditure component (personal consumption,
gross investment, government consumption and gross investment, or net exports) will be affected.
a.
Norm, a frequent visitor to a local bar, purchases a Budweiser beer. (Budweiser beer is
domestically produced.)
b.
The owner of the local bar purchases a new domestically made cooler unit in which to store his
beer.
c.
Carla, a U.S. foreign exchange student, works her way through college in Germany as a
waitress in a bar.
d.
On her night off, Carla purchases a Budweiser beer for her friend in the German bar.
This is counted in U.S. GDP as a personal consumption expenditure.
b.
This is counted in U.S. GDP as an investment expenditure.
This is not counted in U.S. GDP (but would be counted in U.S. GNP).
d.
This is counted in U.S. GDP as an export.