3
CHAPTER 2: MEASUREMENT OF
MACROECONOMIC VARIABLES
Additional Questions
Problems and/or essay questions:
1. What impact do you think that the movement of women from working in the household to
working in the market has had on GDP? Why? Do you think that this points to a problem
with GDP?
2. Explain the difference between the CPI and GDP deflator measures of inflation. Which one
is likely to measure inflation higher? Why?
3. Assume the following national income accounting data in billions of dollars:
transfer payments to persons
500
personal taxes
120
Corporate profit tax payments, undistributed profits and valuation adjustments
200
interest paid to businesses
50
contributions to Social Security
350
net personal transfer payments to foreigners
15
personal interest income
160
government purchases of goods and services
100
consumption expenditures
750
gross investment
80
imports of goods and services
20
exports of goods and services
10
Depreciation
250
indirect taxes
100
a. Calculate gross national product.
4 CHAPTER 2
b. Calculate net national product.
c. Calculate national income.
e. Calculate personal disposable income.
MEASUREMENT OF MACROECONOMIC VARIABLES 5
f. Calculate personal saving.
4. The implicit GDP deflator rose from 112.7 in 2005 to 116 in 2006. Calculate the rate of
inflation between those 2 years.
5. What kinds of economic activities are excluded from GDP? If GDP misses these things,
then why do we use it?
6. Why should imports be excluded from gross domestic product? How is a purchase of an
import recorded in the components of GDP?
7. Briefly explain why gross domestic product is not a welfare measure.
8. Distinguish between investment goods and consumption goods. If you buy a car, is it
investment or consumption? What if IBM buys a car? Are inventories a consumption or
investment good?
9. Explain the difference between actual output and potential output. What does the difference
between these variables represent?
10. Discuss four problems with the CPI. Does the CPI tend to overestimate or underestimate
the true inflation rate? How big is this bias?
11. Are all categories of government expenditures included in gross domestic product? What
government activities are not included in GDP?
12. Consider the following economy:
2005 2006
Price Qty Price Qty
Cars $2,000 10 $3,000 12
Oranges $1 1000 $1 1000
Computers $1,000 4 $500 6
Calculate chain-weighted GDP inflation between these two years. Would your answer be
different if you used GDP inflation using only 2005 as the base year? Why or why not?
13. How does the treatment of international transactions differ with respect to gross national
product and gross domestic product? Explain. Why do you think that the U.S government
has switched from using GNP to using GDP
14. Discuss how economists measure the following: (i) aggregate expenditure, (ii) aggregate
income, and (iii) aggregate output.
MEASUREMENT OF MACROECONOMIC VARIABLES 7
Additional Problems and/or Essay Questions:
15. What is the relationship between national income, personal income, disposable income, and
GDP?
16. Why don’t we count goods used in the production process, such as iron ore in steelmaking
and sugar in cookie baking, when we are computing GDP? Are there any exceptions to this
practice of not counting intermediate goods in GDP?
17. When should you expect to find nominal GDP above real GDP? When should you expect
to find real GDP above nominal GDP? Explain your answer in conjunction with discussing
how each of these variables is calculated.
18. Consider Table 2-7 in your book on the dating of business cycles. Characterize the business
cycles listed here. Are they of regular length? Are they regularly spaced? What might this
tell you about the difficulty of predicting business cycles?
19. In the national income accounts, education expenditures are treated as consumption. Do
you think that this is appropriate? Why or why not? Why do you think the government
records it this way?
20. Per capita GDP in the US was about $48,000 in 2011 and about $1,500 in India, a ratio of
about 32 to 1. Do you think that this means that the US is really 32 times richer than India?
Why or why not? What additional data would you need in order to make this calculation?
Multiple-Choice Questions:
1. The broadest measure of the aggregate price level is the
2. If the value of a price index was 125 for 2005 and 75 for 1982, and GDP was 2500 in 2005
compared to 600 in 1982, the value of real 2005 GDP in terms of 1982 prices is
3. The index that measures the change in price of a typical basket of consumer goods is
4. The investment component of GDP includes
5. If the nominal GDP is $12,000 in 2005 and $15,000 in 2006, and if inflation is 10%
between these years, then
6. Personal income equals personal disposable income plus
7. To calculate personal savings, you would need information on all of the following except:
8. In the event of deflation, or negative inflation, then
9. If real GDP exceeds potential GDP, this means that
10. In the base year, the relationship between nominal and real GDP is
11. The calculation of potential output in the United States has been complicated recently by
problems in
12. Which of the following are not included in the consumption component of gross domestic
product?
13. Goods in the CPI inflation are weighted by
14. Gross domestic product includes
15. Chain-weighted GDP deflator inflation differs from GDP deflation inflation because:
16. National income is defined as gross national product minus
17. Inventory is the
18. Business fixed investment
19. Consumption expenditure includes
20. Inventory investment is
21. Real gross national product is
22. Based on the data in Table 2-7, recessions in the U.S. are
23. Government purchases of goods and services
24. Which of the following governmental expenditures are not included in gross domestic
product?
25. Assume that gross national product amounts to $4300.5 billion, depreciation is $550.1
billion, and indirect taxes are $399.3 billion. Then, net national product amounts to
26. Which of the following are not included as a component of national income?
27. In the U.S., the largest share of national income is earned in the form of
28. The most commonly used measure of changes in the cost of living for households
29. Which of the following indices best signals future movements in retail prices?
30. Personal saving
31. Potential output
32. The primary emphasis in U.S. national income accounts is on
33. Profits earned in the United States by a foreign-owned firm would be included in
34. In the U.S., government expenditure accounts for
35. The most volatile component of GDP over the business cycle is
36. When moving from gross domestic product to gross national product, one has to
37. Which of the following helps economists avoid double counting in computing of GDP?
38. Which of the following would be included in GDP?
39. Policymakers utilize gross domestic product figures
40. The natural rate of unemployment
41. Which of the following is true about unemployment?
42. GDP is an imperfect measure of well-being because
43. A recession is a period when
44. Which of the following statements is (are) correct?
45. The contemporary rate of unemployment that is often put forth as a benchmark high-
employment level ranges from
46. In the United States, an official dating of business cycles
47. In 1996, an advisory commission, appointed by the Senate Finance Committee, estimated
48. The CPI overestimates inflation because
49. The value of every monetary transaction in the economy would be included in
50. What was the largest and most important economic event of the 1900s?
51. A new chain-weighted measure of real GDP
52. Possible sources of an upward bias in the CPI include the
53. The period between a business cycle peak and the subsequent trough is called
54. Suppose that Firestone Tires buys raw rubber for $5,000 and then uses this to make tires it
sells for $20,000. As a result, GDP has risen by:
55. Suppose that Apple computer buys computer components for $10,000 and uses them to
make ipods that they sell to Best Buy for $30,000. Best Buy sells these ipods for $32,000.
As a result, GDP has risen by:
56. Suppose that a firm spends $200,000 to build a factory in 2012 that is expected to have a
life of 10 years. As a result, GDP in 2012 will increase by:
57. In the national income accounts, investment includes all of the following EXCEPT:
58. The largest component of GDP in the US is typically:
59. If a US citizen is employed by a US company in Russia, the income she earns is:
60. What is the relationship between real and nominal GDP?