17) The data show Argentina’s GDP (using purchasing power parity) in billions of dollars.
Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
GDP($) 182 209 235 255 277 274 294 324 340 333 338 330 300
Year 2003 2004 2005 2006
GDP($) 333 373 420 470
The data show that
A) Argentina’s economy reached a peak in 1998.
B) GDP per person increased between 1990 and 2006.
C) Argentina’s potential GDP doubled between 1990 and 2006.
D) Argentina’s economy entered a recession in 2000.
18) The following data show Uruguay’s GDP using purchasing power parity in billions of
dollars.
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008
GDP($) 26.1 25.8 23.3 24.3 27.9 30.1 33.9 37.2 40.2
Using the data, we can conclude that
A) Uruguay’s economy reached a peak in 2000.
B) GDP per person in Uruguay almost doubled between 2000 and 2008.
C) potential GDP in Uruguay doubled between 2000 and 2008.
D) Uruguay’s economy was entered a recession in 2008.
82
19) The following data show Uruguay’s GDP using purchasing power parity in billions of
dollars.
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008
GDP($) 26.1 25.8 23.3 24.3 27.9 30.1 33.9 37.2 40.2
Using the data, we can conclude that
A) the standard of living did not change in Uruguay between 2000 and 2008.
B) Uruguay entered a recession in 2001.
C) potential GDP decreased in 2001.
D) Uruguay’s economy reached a peak in 2005.
20) The following data show Uruguay’s GDP using purchasing power parity in billions of
dollars.
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008
GDP($) 26.1 25.8 23.3 24.3 27.9 30.1 33.9 37.2 40.2
Using the data, we can conclude that
A) Uruguay’s economy entered a recession in 2005.
B) Uruguay’s standard of living increased steadily between 2000 and 2008.
C) potential GDP more than doubled between 2000 and 2008.
D) Uruguay’s economy reached a trough in 2002.
2) How does the production of a U.S. firm located in France affect U.S. GDP? How does the
production of a French firm located in Ohio affect U.S. GDP?
3) Why are only final goods and services included in measuring GDP? Give examples to
complete your answer.
4) Is every product produced in the United States included in U.S. gross domestic product?
5) Define and distinguish between final goods and intermediate goods.
6) Neither intermediate goods nor used goods are included in GDP. Explain why these
expenditures are not included in GDP.
7) What are the categories of total expenditure?
8) How do firms and households interact within the context of the circular flow model?
9) What is the relationship shown by the circular flow among income, total expenditure, and
GDP?
10) Use the idea of the circular flow diagram to explain why the value of production equals total
income equals total expenditure.
11) What is the distinction between gross investment and net investment?
12) Explain how gross investment, depreciation, net investment, and the capital stock are related.
13) What is the relationship between gross investment, net investment, and depreciation? Which
measures the change in the capital stock?
14) Explain the relationship among the capital stock, gross investment, net investment, and
depreciation.
15) Explain the difference between the capital stock, gross investment, depreciation, and net
investment.
16) Define gross investment and net investment. Discuss the relationship between gross
investment and net investment.
17) “When a company’s depreciation is larger than its gross investment, net investment becomes
negative and the firm’s capital stock decreases.” Is the previous statement correct or incorrect?
Explain your answer.
18) Investment, as included in GDP, consists of what?
19) How are changes in inventory treated in GDP?
20) “To calculate GDP, economists begin with total income earned and then subtract total
expenditure by the four sectors of the economy.” Is the previous sentence true or false? Explain
your answer.
21) List the components of the expenditure approach to measuring GDP.
22) List and compare the four components of the expenditure approach to calculating GDP.
23) Explain how GDP is measured according to the expenditure and income approaches.
24) How does the income approach measure GDP?
25) What must be done to net domestic product at factor cost in order to transform it to gross
domestic product? Explain why these adjustments are necessary.
26) Several adjustments must be made to net domestic product at factor cost in order to calculate
GDP. One of these adjustments is adding depreciation. What is depreciation and why must it be
added?
27) What is the difference between real and nominal GDP and why do economists make this
distinction?
28) Is it possible for nominal GDP to increase while real GDP does not change?
29) Can nominal GDP ever be less than real GDP?
30) What is the relationship between actual and potential real GDP?
31) Explain the relationship between real GDP and potential GDP during the two phases of the
business cycle.
32) Explain the relationship between potential GDP and real GDP in the United States since the
early 1960s. You do not need to tell what happened during any specific year; just describe the
general relationship.
33) What is a business cycle?
34) List and explain the two phases and two turning points of the business cycle.
35) What is a recession?
36) Explain the business cycle by describing the phases and turning points.
37) Why does real GDP have limitations in determining economic welfare?
38) Explain how our economic welfare depends upon our level of real GDP per person but there
might not be a one-to-one relationship between economic welfare and real GDP per person. Give
examples of things that can effect one but not the other.
39) “If country A has a higher level of real GDP per person than country B, then people in
Country A must enjoy a higher standard of economic welfare than people in Country B.” Is this
statement true or false and explain your answer.
40) List and discuss various types of goods and services omitted from measured GDP.
41) What would happen to measured GDP if more people started hiring workers to do house
chores such as cooking and cleaning?
42) What is “underground production”? Is it included in GDP?
43) Explain how underground economic activity affects measurement of GDP.
44) While studying with your friend, your friend states, “Our leisure time increases GDP but
lowers our economic welfare because it reduces the amount of goods and services we can
consume.” Is your friend’s statement CORRECT?
45) If you buy a new water skis and other new equipment for $2,500 and take a week off of your
job, where you earn $1,000 a week, to go water skiing. The equipment you purchased was all
produced in the United States. You think that the week was worth $4,000. As a result of your
vacation, GDP changes by how much?
1) Assume a small nation has the following statistics: its consumption expenditure is $15 million,
investment is $2 million, government purchases of goods and services is $1 million, exports of
goods and services to foreigners is $1 million, and imports of goods and services from foreigners
is $1.5 million. Calculate this nation’s GDP.
Item
Billions of
dollars
Consumption expenditure
6,258
Investment
1,623
Government expenditure on
goods and services
1,630
Exports of goods and
services
998
Imports of goods and
services
1,252
2) The table above gives the values of different expenditures in the United States during 1999.
Answer the following questions about the United States.
a) What was the value of net exports of goods and services in 1999?
b) What was (nominal) GDP equal to in 1999?
c) What was the (nominal) value of total production equal to in 1999?
3) On January 1, 2015, United Delivery had trucks valued at $1.3 million. During 2015, United
Delivery purchased new trucks valued at $500,000. If the value of the trucks on December 31,
2015 was $1.5 million, what is the amount of its net investment and its depreciation during
2015?
7 True or False
1) When IBM, an American firm, produces computer chips in another country, this production is
not included in U.S. GDP because the production did not take place in the United States.
2) The circular flow diagram shows that the flow of payments to the factors used to produce
goods and services exceeds the flow of payments for final goods and services.
3) The circular flow diagram shows only the aggregate expenditures measure of GDP.
4) The circular flow shows that aggregate spending is larger than aggregate income because
people save.
5) When gross investment is greater than depreciation, then the nation’s capital stock increased.
6) Net investment equals gross investment minus depreciation.
7) If depreciation exceeds gross investment, net investment is negative.
8) The expenditure approach to measuring GDP includes firms’ spending on wages.
9) Intermediate goods and services are one of the largest components of the expenditure
approach to measuring GDP.
10) To calculate GDP using the expenditure approach, in part it is necessary to add exports and
subtract imports.
11) To calculate GDP when using the income approach, you must add indirect business taxes and
depreciation.
12) The largest component of income is proprietors’ income.
13) A productivity growth slowdown can be shown as year-to-year fluctuations of real GDP
around potential GDP.
14) Real GDP fluctuates from year to year but is always below potential GDP.