Article Summary
In the third quarter of 2015, the Chinese economy grew by 6.9 percent, just below the government’s
target of 7 percent and its slowest growth rate since 2008. A decline in manufacturing and imports
led the slowdown, with fears that the slower growth will continue despite government stimulus
measures. The Chinese government has been trying to move away from an export-based economy to
one led by consumption and the service sector, and Sheng Laiyun, a spokesman for the Chinese
statistics agency, has stated that the service sector is expected to grow rapidly. However, economists
believe more government stimulus measures are needed to reverse the slowdown in economic
growth.
Source: “China’s economic growth slows to 6.9%,” bbc.com, October 19, 2015.
69) Refer to the Article Summary. According to the summary, the Chinese economy is trying to move
away from an export based economy, while at the same time imports have declined. This decrease in
exports and decrease in imports will
A) definitely increase net exports.
B) definitely decrease net exports.
C) increase net exports if the decline in exports is greater than the decline in imports.
D) decrease net exports if the decline in exports is greater than the decline in imports.
70) In a small economy, gross investment is $1,500, consumption spending is $6,000, net investment is
$200, government spending is $1,500, exports are $2,000 and imports are $1,000. What is GDP for this
economy?
A) $10,700
B) $10,300
C) $10,200
D) $10,000
71) In a small economy, consumption spending is $6,000, government spending is $1,200, gross
investment is $1,500, exports are $2,000, and imports are $1,000. What is gross domestic product?
A) $9,700
B) $9,800
C) $10,800
D) $11,700
72) Consumption spending is $4.5 billion, gross private domestic investment is $3 billion, and
government expenditures are $2 billion. If GDP is $14 billion, which of the following could be true
regarding exports and imports in the economy?
A) Exports are $4.5 billion, and imports are $2 billion.
B) Exports are $6 billion, and imports are $8.5 billion.
C) Exports are $9 billion, and imports are $6 billion.
D) Exports are $15 billion, and imports are $10.5 billion.
Table 8-6
Product
Quantity
Price per Unit
Coke
10,000
$2
iPhones
2,000
150
Backpacks
4,000
25
Hershey bars
8,000
1
73) Refer to Table 8-6. Consider the table of production and price statistics for a small economy in 2013.
If the economy only produces the four goods listed below, what is GDP for 2013?
A) $428,000
B) $267,000
C) $24,000
D) $1,424
74) Which of the following would increase gross private domestic investment in an economy?
A) an increase in the shares of Apple stock households own
B) an increase in the number of workers Apple hires
C) an increase in the level of Apple’s inventory
D) an increase in the number of highway construction projects the government is funding
75) Which of the following equations correctly measures GDP in an economy?
A) GDP = C + I + G + X
B) GDP = C + net I + G + NX
C) GDP = C + I + G + NX
D) GDP = C + G + I – taxes
76) Between 2015 and 2016, if an economy’s exports rise by $8 billion and its imports fall by $8 billion,
by how much will GDP change between the two years, all else equal?
A) Net exports will increase GDP by $8 billion.
B) The increase in exports is offset by the decrease in imports, so there is no change in net exports and
no effect on GDP.
C) Net exports will increase GDP by $16 billion.
D) Net exports will decrease GDP by $8 billion.
77) Which of the following would result in GDP for an economy equal to $10 trillion?
A) C = $6 trillion
I = $2 trillion
G = $1.5 trillion
NX = -$2 trillion
B) C = $7 trillion
I = $2 trillion
G = $4 trillion
NX = $3 trillion
C) C = $5 trillion
I = $5 trillion
G = $2 trillion
NX = -$2 trillion
D) C = $4 trillion
I = $3 trillion
G = $2 trillion
NX = -$1 trillion
78) Which component of consumption spending is the greatest in a typical economy?
A) services
B) durable goods
C) nondurable goods
D) new housing
79) Total income in an economy is equal to
A) GDP minus net exports.
B) income minus taxes.
C) the sum of wages, interest, rent, and profit.
D) firm revenues.
80) To calculate GDP using the value-added method, one would add up
A) the market value of final goods and services produced during a particular period.
B) only the value added by the underground economy.
C) the value added by each firm involved in the production of final goods and services.
D) the market value of intermediate goods and services produced during a particular period.
81) Which of the following would not be included in the expenditure category called investment
expenditures?
A) spending on new houses
B) a purchase of shares of preferred stock
C) a purchase of a copy machine by FedEx Office
D) the cars held in inventory on a local Ford dealer’s lot
82) The circular flow diagram shows that
A) the value of total income is equal to the total value of expenditures on final goods and services.
B) firms pay households wages, and households receive transfer payments from firms.
C) households spend all their income on goods and services.
D) GDP will be less than the total value of expenditures on final goods and services in the economy.
83) Caroline is an artist. She purchases canvas, paints, brushes, and accessories for $75. She sells one of
her original paintings to an art gallery for $1,500, even though an art lover would pay $4,500 for that
painting. How much value does Caroline add?
A) $75
B) $1,425
C) $1,500
D) $4,425
84) Caroline is an artist. She purchases canvas, paints, brushes, and accessories for $75. She sells one of
her original paintings to an art gallery for $1,500, which, in turn, sells it to an art lover for $4,500. How
much value does the gallery add?
A) $1,425
B) $1,500
C) $3,000
D) $4,500
85) Emily is a writer. She buys pens and paper for $20 and writes a 500-page novel that she sells to a
publishing company for $500,000. If the publisher prints 1 million copies that sell for $25 each, what is
the contribution to GDP of Emily’s novel?
A) $25 million
B) $20 million
C) $500,000
D) $50,000
86) In the circular flow diagram, the value of all the income in the economy is greater than the value of
goods and services produced in the economy.
87) Residential investment includes spending by firms on office buildings.
88) High-income countries such as the United States spend a greater amount on services as compared to
goods.
89) If Gladys sells her 1998 Jeep Cherokee for $3,500 in 2016, the sale of her car contributes $3,500 to
2016 GDP.
90) The circular flow of income shows that GDP can be measured as the sum of wages, interest, rent,
and profits received by households or total expenditures on goods and services by households, firms,
government, and the rest of the world.
91) Government spending on transfer payments is included in government purchases when calculating
GDP because it results in the production of new goods and services.
92) Why do we not count the value of intermediate goods and services in gross domestic product? Does
the value of intermediate goods and services show up in gross domestic product? If so, how?
93) People complain that inflation increases the cost of goods and services and therefore reduces their
purchasing power. If inflation and income grow at the same rate, is this complaint valid? Explain
carefully.
94) If the value added of a firm is positive, will the firm necessarily have positive profits?
95) How can a firm have a negative valued added, as supposedly some state-owned businesses did in
the former Soviet Union? What has to be true for value added to be negative?
96) The Bureau of Economic Analysis divides it’s statistics on GDP into four major categories. List the
categories of expenditures and define each.
97) Why do we subtract import spending from total expenditures?
98) Describe briefly how the final value of an iPhone must be equal to the sum of incomes generated by
the production of the iPhone.
99) Debbie makes porcelain plates in her home and sells them to the Opus gallery. She spent $400 last
month on supplies and made 50 plates. She sold the plates to the gallery at $25 per plate. The gallery
sells all the plates for $40 each. For all of the 50 plates, what is Debbie’s total value added? For all the 50
plates, what is the gallery’s total value added?
30
Table 8-7
Product
Quantity
Price
iPods
20
$125.00
T-shirts
100
20.00
Bottled water
2,000
1.00
Oranges
600
0.50
100) Refer to Table 8-7. Suppose that a simple economy produces only four goods and services: iPods,
t-shirts, bottled water, and oranges. Calculate nominal GDP for this simple economy.
Table 8-8
Product
Quantity
Price
Sweaters
50
$50.00
CDs
150
10.00
Sugar
600
1.00
Soft drinks
800
0.75
101) Refer to Table 8-8. Suppose that a simple economy produces only four goods and services:
sweaters, CDs, sugar, and soft drinks. Assume one half of the sugar is used in making the soft drinks
and the other half of the sugar is purchased by households. Calculate nominal GDP for this simple
economy.
31
Table 8-9
Product
Quantity
Price per Unit
Steel
1,000
$100
iPods
5,000
200
Autos
500
25,000
Legal services
100
2,000
102) Refer to Table 8-9. Suppose that the above table represents the goods and services produced in a
very simple economy in 2016. Assume that steel is used as an input in the production of autos. Using
that information, calculate GDP for the year 2016.
103) The table below describes the value added in the production of a gallon of gasoline by each stage of
production. (The values are hypothetical.)
Table 8-10
Stage of Production
Value of Sales
Value Added
Oil drilling
0.75
Refining
1.25
Shipping
1.85
Retail sales
3.65
a) What is the value added by each stage of production?
b) What is the total value added?
For simplicity, you can ignore the cost of the inputs for oil drilling.
Stage of Production
Value of Sales
Value Added
Oil drilling
0.75
$0.75
Refining
1.25
0.50
Shipping
1.85
0.60
Retail sales
3.65
1.80
8.2 Does GDP Measure What We Want It to Measure?
1) The Philippines and Vietnam have roughly the same size population. Suppose the GDP of the
Philippines is $1,000 billion and the GDP of Vietnam is $10,000 billion. You should conclude
A) a typical person in Vietnam is 10 times as well off as the typical person in the Philippines.
B) a typical person in Vietnam is more than 10 times as well off as the typical person in the Philippines.
C) a typical person in Vietnam is less than 10 times as well off as the typical person in the Philippines.
D) it is not possible to make a good comparison of the economic well being of a typical individual in the
2 countries without additional information.
2) Gross domestic product understates the total production of final goods and services because of the
omission of
A) exports.
B) inflation.
C) intermediate goods.
D) household production.
3) Gross domestic product understates the total production of final goods and services because of the
omission of
A) the underground economy.
B) intermediate goods.
C) inflation.
D) exports.
4) The size of the underground economy would tend to decrease if the government of a country
A) decreased government regulations on businesses.
B) made over-the-counter drugs illegal.
C) increased income tax rates.
D) increased business taxes.
5) The size of the underground economy would tend to increase if the government of a country
A) decreased government regulations on businesses.
B) increased income tax rates.
C) legalized prostitution.
D) legalized marijuana.
6) Suppose Bob works for Mary as a proofreader. Mary and Bob fall deeply in love, marry, and have
eight children. Bob stops working for Mary in order to care for the children. What will be the effect on
GDP?
A) GDP will decrease.
B) GDP will increase.
C) GDP will not change.
D) GDP may increase or may decrease depending on inflation.
7) Which of the following statements about the underground economy is true?
A) The underground economy in developing countries amounts to less than 10% of measured GDP.
B) Most transactions that occur in the underground economy are included in the calculation of GDP.
C) Excluding underground economy production from measured GDP causes errors in GDP growth
estimates in the long run.
D) Income that is earned but not reported as income for tax purposes is included in the calculation of
GDP.
8) The informal sector can be a significant drag on the economies of developing countries because the
firms in the informal sector
A) produce goods and services no one wants.
B) sell their goods and services to citizens in other countries.
C) do not pay taxes to the government.
D) employ illegal immigrants from other countries.
9) Recent estimates put the size of the underground economy in the United States at ________ of
measured GDP.
A) 2 percent
B) 8 percent
C) 13 percent
D) over 50 percent
10) Legalizing all forms of illegal activities
A) reduces GDP and reduces the size of the underground economy.
B) reduces GDP and increases the size of the underground economy.
C) increases GDP and reduces the size of the underground economy.
D) increases GDP and increases the size of the underground economy.
11) Which of the following statements is true?
A) A decrease in the crime rate increases GDP as people will spend more on security.
B) Household production is counted in GDP as it amounts to real production.
C) GDP accounting rules do not adjust for production that pollutes the economy.
D) GDP growth distributes income equally to people in the economy.
12) Which of the following is likely to increase measured GDP?
A) A greater number of women decide to stay at home and provide day care for their children under
age 5.
B) Marijuana becomes legal to grow and sell.
C) Tax rates increase and more people attempt to underreport their income for tax purposes.
D) More people decide to do their own lawn maintenance and give up using a professional service.
13) The U.S. work week has declined from 60 hours in 1890 to 40 hours today. The impact of the decline
in working hours
A) increases U.S. GDP and increases the well-being of a typical working person in the U.S.
B) increases U.S. GDP and decreases the well-being of a typical working person in the U.S.
C) decreases U.S. GDP and increases the well-being of a typical working person in the U.S.
D) decreases U.S. GDP and decreases the well-being of a typical working person in the U.S.
14) A sharp increase in the divorce rate increases the number of lawyers hired to determine divorce
settlements. This will
A) increase GDP and increase well-being in the economy.
B) increase GDP and decrease well-being in the economy.
C) decrease GDP and increase well-being in the economy.
D) decrease GDP and decrease well-being in the economy.
15) Increases in real GDP would overstate the increase in the well-being of a country over time if, over
that time period, the
A) average hours worked per week increased.
B) amount of pollution decreased.
C) price level increased.
D) crime rate decreased.
16) Increases in real GDP would understate the well-being of a country over time if, over that time
period, the
A) crime rate increased.
B) percentage of people addicted to illegal drugs increased.
C) amount of pollution decreased.
D) average hours worked per week increased.
17) If GDP calculations included measurements of pollution and environmental damage, GDP values
would most likely be
A) greater than their values without these measurements.
B) less than their values without these measurements.
C) unchanged from their values without these measurements.
D) meaningless, since GDP values without these measurements would no longer be of value.
18) Presently, GDP is ________ to compensate for the costs of environmental damage.
A) fully adjusted
B) partially adjusted
C) adjusted on a chain-weight basis
D) not adjusted
19) GDP is not a perfect measure of well-being because
A) the value of leisure is included in GDP.
B) GDP is not adjusted for pollution.
C) GDP is adjusted for changes in crime rates.
D) GDP is adjusted for increases in drug addiction.
20) Which of the following accurately describes an effect of hurricane Katrina on GDP?
A) GDP would decrease reflecting the costs of cleanup.
B) GDP would increase reflecting the costs of cleanup.
C) GDP would increase reflecting the decrease in production that occurred during the storm and the
productive capacity lost in the storm.
D) GDP would increase well-being.
21) The underground economy can be described as
A) production of intermediate goods and services.
B) economic production that includes mining.
C) economic activity that is hidden from the government to avoid taxes or because the activity is illegal.
D) production of infrastructure that spurs growth in the rest of the economy.
22) Which of the following is counted in GDP?
A) the value of goods and services produced in the underground economy
B) the cost of a speed boat purchased by drug smugglers
C) the value of do-it-yourself work
D) the value of leisure
23) Marla is an architect who is designing a home for Chuck. Chuck is paying Marla $150 per hour to
design his new home. When Chuck and Marla get married, Marla continues to work on designing the
home, but she no longer charges Chuck for her work. As a result, GDP ________ because ________.
A) falls; Marla’s work takes place in the underground economy once she’s married
B) falls; Marla’s work becomes less valuable once she’s married
C) falls; Marla’s architectural design services are no longer bought by Chuck once they’re married
D) rises; Marla becomes more productive once she’s married
24) “Household production” refers to
A) the manufacturing of durable household products.
B) the home building sector of the economy.
C) home-based craft businesses.
D) goods and services people produce for themselves.
25) The “underground economy” is also referred to as
A) the informal sector.
B) the formal sector.
C) the halfway economy.
D) the net domestic product economy.
26) In an “underground economy,” the production of goods and services
A) is not measured or included in GDP.
B) is not measured but is included in GDP.
C) is measured and included in GDP.
D) is usually too insignificant to be included in GDP.
27) Scott is a woodworker and charges $125 an hour for his time manufacturing custom-made wood
products. For his wife’s birthday, he designs and creates an intricate birdseye maple jewelry box that
takes him 15 hours to complete. By how much and in what direction does GDP change as a result of his
efforts?
A) GDP rises by $1,875.
B) GDP is not affected by Scott’s production of the jewelry box.
C) GDP rises by $125.
D) GDP falls by $1,875.
28) The “underground economy” refers to
A) the buying and selling of goods that is concealed from the government.
B) the production of goods and services used by the government for covert spy operations.
C) the sector of the economy that earns profits that are higher than average.
D) the formal sector of the economy in developing countries.
29) Which of the following transactions would take place in the “underground economy”?
A) Elizabeth tells her mother she‘s going to work but really goes to see a movie.
B) Paul buys 15 gallons of gasoline for $3.29 a gallon, not realizing that $1.50 per gallon of that price
goes to the government as tax revenue.
C) John makes chain-link belts and necklaces and sells them at a local flea market for cash to avoid
paying taxes.
D) Matt bought an iPad for $499 but decided to sell it on eBay instead of keeping it.