Chapter 8 Measuring the Economy s Performance 137
107) Define and explain gross domestic product.
108) Why aren t financial transactions, sales of secondhand goods, and household production
included in measuring GDP?
8.3 Two Main Methods of Measuring GDP
1) The two principle methods of measuring Gross Domestic Product are the
A) flow approach and the stock approach.
B) expenditures approach and the income approach.
C) intermediate approach and the value added approach.
D) domestic approach and the international approach.
2) Which of the following statements is TRUE?
A) The value of illegal activities is included in Gross Domestic Product (GDP).
B) The value of a homemaker s services is included in Gross Domestic Product (GDP).
C) The value of intermediate goods is included in Gross Domestic Product (GDP).
D) Gross Domestic Product (GDP) may be calculated using the income or the expenditure
approach.
3) Which one of the following statements about GDP is true?
A) GDP can be calculated using the income approach.
B) The value of household production is excluded from GDP.
C) GDP can be calculated using the expenditures approach.
D) all of the above.
4) When we use the term fixed investment, we include in investment
A) the purchase of stocks and bonds.
B) the purchase of consumer goods.
C) the purchase of private bonds, but not government bonds.
D) the purchase of equipment and other capital goods.
5) When one uses the expenditure approach to calculate Gross Domestic Product (GDP), which of the
following would be included?
A) government spending at the state level B) household purchases of legal services
C) inventory investment D) all of the above
6) Suppose that for the economy of Springfield, we have the following information for 2010:
consumption expenditures $4,000; wages $3,500; gross private domestic investment
$1,300; government expenditures $2,000; exports $900; imports $1,100. Using the
expenditure approach what would the Gross Domestic Product (GDP) be for Springfield in 2010?
A) $6,200 B) $7,100 C) $7,500 D) $10,600 E) $12,800
7) Which of the following spending components makes up the largest percentage of Gross
Domestic Product (GDP)?
A) Consumption expenditures
B) Government expenditures
C) Gross private domestic investment expenditures
D) Expenditures on net exports of goods and services
8) Durable consumer goods include all of the following EXCEPT
A) an automobile. B) stock in IBM.
C) a computer. D) a compact disc player.
9) Examples of nondurable consumer goods include all of the following EXCEPT
A) a pizza delivered to your home. B) a cup of coffee.
C) a stereo system. D) a ticket to the movies.
10) Services include all of the following EXCEPT
A) payment for a doctor s visit. B) the purchase price of a share of stock.
C) school tuition. D) payments for auto repair.
11) Which of the following is an example of the gross private domestic investment component of
Gross Domestic Product (GDP)?
A) You buy a share of GM stock.
B) GM buys a new drill press.
C) You put money into your savings account.
D) You put money into your checking account.
12) Which of the following are examples of the gross private domestic investment component of
Gross Domestic Product (GDP)?
I. The purchase of production machinery
II. An increase in finished goods inventory
A) I only B) II only C) Both I and II D) Neither I nor II
13) Which of the following is part of gross private domestic investment?
A) Purchases of stocks and bonds
B) A decline in consumer debt
C) Purchases of hamburgers for a family dinner
D) A positive change in business inventories
14) Which one of the following is a durable consumer good?
A) Furniture
B) Gasoline
C) Food
D) Office supplies that will be used up this year
15) When the total quantity of unsold new Chevrolets increases from 50,000 to 75,000,
A) the economy experiences a period of disinvestment.
B) the economy s level of competition increases.
C) there is an increase in the rate of aggregate output.
D) the producer engages in an inventory investment.
16) Inventory investment occurs when
A) grocers sell stocks of canned goods off their shelves.
B) individuals invest in an invention.
C) shopkeepers check their inventories.
D) automobile dealers add to their stocks of unsold cars.
17) Durable consumer goods are goods that
A) last for more than three years. B) last for more than one year.
C) are used up within three years. D) are used up within one year.
18) Food and gasoline can be classified as
A) nondurable goods. B) durable goods.
C) capital goods. D) long term goods.
19) Calculating Gross Domestic Product (GDP) by the expenditure approach requires summing the
value of
A) all income paid to individuals.
B) all transactions in the economy.
C) all final goods and services produced in the economy.
D) all expenditures by individuals.
20) Which of the following is included in gross private domestic investment?
I. The purchase of new capital goods
II. An increase in business inventories
A) I only B) II only C) Both I and II D) Neither I nor II
21) If a firm produces more output than it sells, there will be
I. An increase in the firm s inventories
II. An increase in the gross private investment of the nation
A) I only B) II only C) Both I and II D) Neither I nor II
22) Fixed investment includes
A)
b
usiness spending on plant and equipment.
B)
b
usiness spending on printing paper.
C)
b
usiness salaries.
D) labor union contracts.
23) Which of the following is an example of investment in computing Gross Domestic Product
(GDP)?
A) An increase of inventory stock in an auto dealership
B) A deposit of $2,000 in a bank
C) A laptop purchased by a student
D) The purchase of government bonds by a retiree
24) Which of the following is included in Gross Domestic Product (GDP)?
A) Purchases of stocks and bonds by individuals
B) Purchases of stocks and bonds by firms
C) Sales of financial assets to foreign firms
D) Investment spending on capital goods
25) Depreciation is
A) added to Gross Domestic Product (GDP) to reach Net Domestic Product (NDP).
B) the reduction in the value of capital goods due to physical wear and tear.
C) not included in Gross Domestic Product (GDP) from the income side.
D) always higher than the capital consumption allowance.
26) Net domestic product (NDP) is
A) Gross Domestic Product (GDP) minus depreciation.
B) Gross Domestic Product (GDP) minus private investment.
C) Gross Domestic Product (GDP) minus the foreign sector.
D) Gross Domestic Product (GDP) minus government transfers.
27) The components of the expenditure approach to measuring Gross Domestic Product (GDP)
include all of the following EXCEPT
A) government purchases of goods and services.
B) government Social Security payments.
C) durable consumer goods.
D) nondurable consumer goods.
28) An example of an increase in gross private domestic investment spending that also increases
Gross Domestic Product (GDP) is when
A) a family sells its home because of a transfer.
B) a farmer buys a used tractor.
C) inventories of new cars accumulate on the lots of car dealers.
D) government increases spending on infrastructure.
29) A capital good is
A) one produced by the government.
B) part of investment spending when purchased by either private businesses or by the federal
government.
C) one that is purchased in order to make other goods and services.
D) not part of Gross Domestic Product (GDP) because it is an intermediate product.
30) If all other factors are held constant, an increase in imports
A) causes an increase in exports of the same size.
B) causes Gross Domestic Product (GDP) to increase.
C) causes Gross Domestic Product (GDP) to decrease.
D) can cause Gross Domestic Product (GDP) to increase or decrease, depending on whether
the imports are purchased by consumers or by business firms.
31) If Gross Domestic Product (GDP) equals $1 trillion, gross private investment expenditures are
$200 billion, exports equal imports, and government spending is $400 billion, then
A) consumption expenditures are $200 billion.
B) consumption expenditures are $400 billion.
C) spending on consumer durables must be $400 million.
D) we cannot determine what expenditures on consumption are without more information.
32) Because of improved productivity, wages increase 10 percent. As a result, gross domestic
income increases. What happens to Gross Domestic Product?
A) Gross Domestic Product also increases since consumption expenditures would increase.
B) Gross Domestic Product decreases as people pay more taxes on their higher incomes.
C) Gross Domestic Product would not change since consumption expenditures would rise
but investment spending would fall.
D) Gross Domestic Product would decrease because businesses are spending more on wages.
33) A decrease in U.S. income earned abroad will make all of the following smaller EXCEPT
A) national income. B) net domestic product.
C) personal income. D) disposable personal income.
34) If Net Domestic Product (NDP) is $50 less than Gross Domestic Product (GDP), we know that
A) inventories increased over the year. B) inventories decreased over the year.
C) net investment equals $50. D) depreciation equals $50.
35) If C consumption, G government expenditures, and I gross private investment
expenditures, the mathematical representation of Gross Domestic Product (GDP) using the
expenditure approach is
A) Gross Domestic Product (GDP) C I G Transfers.
B) Gross Domestic Product (GDP) C I G Imports.
C) Gross Domestic Product (GDP) C Imports.
D) Gross Domestic Product (GDP) C I G Net exports.
36) One method of calculating Gross Domestic Product (GDP) is to add together
A) investment, consumption, gross profits, and net exports.
B) consumption, investment, government spending, and net exports.
C) wages, gross profits, net investment, and net exports.
D) consumption, wages, interest, rental income, and exports.
37) Gross Domestic Product (GDP) exceeds net domestic product by an amount equal to
A) indirect business taxes.
B) corporate profits plus personal taxes.
C) the capital consumption allowance (depreciation).
D) transfer payments minus personal taxes.
Consumption expenditures on goods and services $1,500
Total government spending on goods and services 590
Gross private domestic investment 355
Imports 50
Exports 70
Depreciation (capital consumption allowance) 200
Net U.S. income earned abroad 75
38) According to the above table, Gross Domestic Product (GDP) is
A) $2,190. B) $2,840. C) $2,465. D) $2,750.
39) Which of the following is included when measuring Gross Domestic Product (GDP)?
A) The value of services of durable goods purchased in previous years
B) The value of leisure time
C) The value of services provided by homemakers
D) The rental income received by a landlord
40) When using the income approach to estimate Gross Domestic Product (GDP), which of the
following would NOT be included?
A) The implicit rental value of owner occupied housing
B) Proprietors income
C) Personal consumption expenditures
D) Net interest received by households
41) The value of Gross Domestic Product (GDP), when estimated by the income approach, is the
sum of
A) consumption expenditures, investment spending, and profits.
B) consumption, wages, rents, interest, and profits.
C) income earned by all factors of production, indirect business taxes, corporate income taxes,
and personal income taxes.
D) depreciation, business income adjustments less indirect business taxes, U.S. net income
earned abroad and income earned domestically by factors of production.
Net interest $739
Net U.S. income earned abroad 36
Wages and salaries 8,735
Rental income 237
Other business income 1,202
adjustments less business transfers
Change in business payments 262
Inventories 14
Personal consumption 1,250
Proprietorial income 1,128
Gross investment spending 1,479
Indirect business taxes 1,059
Corporate profits before taxes 1,194
Exports 249
Depreciation 1,833
42) According to the above table, Gross Domestic Product as calculated by the income approach is
A) $10,121 billion. B) $10,646 billion. C) $14,925 billion. D) $15,619 billion.
43) According to the above table, net domestic product is
A) $8,813 billion. B) $12,603 billion. C) $13,092 billion. D) $13,750 billion.
44) According to the above table, national income is
A) $13,271 billion. B) $11,917 billion. C) $10,770 billion. D) $10,646 billion.
Indirect Business Taxes $1,200
Gross Corporate Profits plus Proprietors Income $2,140
Rental Income (including implicit rents) $175
Net Interest $650
Depreciation (capital consumption allowance) $1,775
Wage and Salary Income $8,200
45) According to the above table, Gross Domestic Product is
A) $14,140. B) $13,965. C) $13,315. D) $12,115
46) According to the above table, net domestic product is
A) $14,390. B) $13,190. C) $12,540. D) $12,365.
47) Calculating Gross Domestic Product (GDP) by the income approach would require including
A) all transfer payments by the government.
B) all wages paid.
C) all restaurant sales.
D) the market value of all final goods and any profits.
48) Which of the following is included in the calculation of Gross Domestic Product (GDP) using the
income approach?
I. Wages and salaries.
II. Net exports.
A) I only B) II only C) Both I and II D) Neither I nor II
49) Non income expense items included in the Gross Domestic Product (GDP) calculation include
A) depreciation and indirect business taxes.
B) depreciation and corporate profits.
C) corporate profits tax and indirect business taxes.
D) indirect business taxes and corporate profits.
50) Indirect business taxes refer to
A) depreciation expenses. B) sales and local taxes paid by business.
C) payments for low skilled labor. D) dividend taxes paid by the corporation.
51) The largest category of gross domestic income is
A) interest. B) rent. C) wages. D) profits.
52) If households pay $1,000 in interest payments and receive $1,200 in interest, wages equal $8,000,
rental receipts on land are $200, total business profits before taxes are $2,200, depreciation is
$1,750, and indirect business taxes are $1,000, then gross domestic income is
A) $15,350. B) $13,350. C) $13,150. D) $11,400.
53) The two main methods of measuring GDP are
A) the income approach and the expenditure approach.
B) the income approach and the receipts approach.
C) the goods approach and the services approach.
D) the saving approach and the investment approach.
54) The expenditure approach to measuring GDP
A) adds the dollar value of final goods and services.
B) adds the income received by all factors of production.
C) excludes durable consumer goods since they last more than a year.
D) excludes profits since profits are a cost of production.
55) The computation of GDP by adding up the dollar value at current market prices of all final
goods and services is
A) the expenditure approach. B) the income approach.
C) transfer payments. D) the value of all securities.
56) The components of the expenditure approach to measuring GDP include all of the following
EXCEPT
A) net exports.
B) government purchases of goods and services.
C) expenditures for business investments.
D) the implicit payments for unpaid household work.
57) In calculating GDP, your tuition expenditures at college are classified as
A) consumer expenditures on services.
B) consumer expenditures on goods.
C) consumer expenditures on durable goods.
D) investment spending.
58) A consumer good that has a life span of more than three years is a(n)
A) durable consumer good. B) nondurable consumer good.
C) service. D) investment.
59) A consumer good that is used up within three years is a(n)
A) durable consumer good. B) nondurable consumer good.
C) service. D) investment.
60) Mental or physical labor or help purchased by consumers is a(n)
A) durable consumer good. B) nondurable consumer good.
C) service. D) investment.
61) Durable consumer goods are goods that last more than
A) one year. B) three years. C) five years. D) seven years.
62) Which of the following would NOT be included in consumption expenditures when calculating
GDP?
A) an individual s purchase of a new car
B) an individual s purchase of medical services
C) an individual s purchase of newly issued shares of IBM stock
D) an individual s purchase of legal services
63) A nondurable good
A) has a life span of more than 3 years. B) is used up within 3 years.
C) applies only to services. D) is an intangible commodity.
64) A durable good
A) has a life span of more than 3 years. B) is used up within 3 years.
C) applies only to services. D) is an intangible commodity.
65) An example of a durable good is
A) items purchased at a grocery store. B) a refrigerator.
C) the purchase of labor for a business. D) the services of a cleaning person.
66) An example of a nondurable good is
A) items purchased at a grocery store. B) a refrigerator.
C) the purchase of labor for a business. D) the services of a cleaning person.
67) Which of the following is included in government expenditures when measuring GDP?
A) Social Security payments B) Unemployment expenditures
C) Goods imported into the United States D) The President s income
68) When economists refer to investment expenditures they mean the
A) purchase of a consumer nondurable goods.
B) purchase of stocks or bonds.
C) use of today s resources to expand tomorrow s production or consumption.
D) production of intermediate goods.
69) Suppose a firm purchases new equipment to replace worn out equipment at its factory. This
purchase of new equipment is considered
A) durable consumption goods. B) inventory investment.
C) gross private domestic investment. D) none of the above.
70) Any use of today s resources to expand tomorrow s production or consumption is a(n)
A) durable consumer good. B) nondurable consumer good.
C) service. D) investment.
71) An increase in fixed investment spending that increases GDP occurs when
A) a family purchases a new car.
B) a business buys a new computer.
C) inventories of new cars are drawn down on the lots of car dealers.
D) the government builds a new office building.
72) A capital good is
A) a good that lasts more than three years.
B) a good that is used to make other goods and services.
C) an intermediate product and therefore not part of GDP.
D) a good that should increase in value over time.
73) Capital purchases by businesses of newly produced durables is known as
A) the expenditure approach. B) the income approach.
C) fixed investment. D) inventory investment.
74) Changes in the stocks of finished goods and goods in process as well as changes in the raw
materials that businesses keep on hand is known as
A) the expenditure approach. B) the income approach.
C) fixed investment. D) inventory investment.
75) Fixed investment is
A) the change in stocks of finished goods.
B) the change in the stocks of goods in process.
C) capital purchase by businesses of newly produced durables.
D) purchases by consumers of newly produced consumer durables.
76) An increase in net exports
A) causes GDP to increase.
B) causes GDP to decrease.
C) causes an increase in imports of the same size.
D) can cause GDP to either increase or decrease, depending on whether the exports are
durable or nondurable.
77) Net exports equal the
A) total value of all exports.
B) total value of all government produced exports.
C) value of exports minus the value of imports.
D) value of imports minus the value of exports.
78) Using the expenditure approach, GDP is calculated as
A) wages interest rent profits
B) consumption expenditures wages
C) consumption expenditures wages interest
D) consumption expenditures investment expenditures government expenditures net
exports
79) The components of GDP using the expenditure method are
A) consumption expenditures, investment expenditures, and government expenditures.
B) consumption expenditures, investment expenditures, government expenditures, and net
exports.
C) wages and interest.
D) wages, interest, rents ,and profits.
80) C I G X equals
A) GDP. B) DPI. C) NDP. D) PI.
81) C net I G X equals
A) GDP. B) DPI. C) NDP. D) PI.
82) If imports are $100 million less than exports, government spending is $500 million, consumer
expenditures are $1 billion, and investment spending is $500 million, then GDP is
A) $1 billion. B) $1.9 billion. C) $2 billion. D) $2.1 billion.
83) If consumption expenditures are $500 million, spending on fixed investment is $100 million, the
increase in inventories equals $5 million, imports are $50 million, exports are $55 million,
government spending on goods and services is $200 million, than GDP is
A) $790 million. B) $800 million. C) $810 million. D) $830 million.
84) Gross domestic product is
A) NDP plus net exports. B) NDP plus taxes.
C) NDP plus depreciation. D) NDP less changes in inventories.