Macro Tut 1: Measuring a nation’s income

MULTIPLE CHOICE: Identify the choice that best completes the statement or answers the question.

1. Which of the following questions is more likely to be studied by a microeconomist than a

macroeconomist?
a. Why do prices in general rise by more in some countries than in others?
b. Why do wages differ across industries?
c. Why do production and income increase in some periods and not in others?
d. How rapidly is GDP currently increasing?

2. For an economy as a whole,

a. wages must equal profit.
b. consumption must equal saving.
c. income must equal expenditure.
d. the number of buyers must equal the number of sellers.

3. In a simple circular-flow diagram, firms use the money they get from a sale to
a. pay wages to workers.
b. pay rent to landlords.
c. pay profit to the firms’ owners.
d. All of the above are correct.

4. Suppose an apartment complex converts to a condominium, so that the former renters are now
owners of their housing units. Suppose further that a current estimate of the value of the
condominium owners' housing services is the same as the rent they previously paid. What happens
to GDP as a result of this conversion?
a. GDP necessarily increases.
b. GDP necessarily decreases.
c. GDP is unaffected because neither the rent nor the estimate of the value of housing
services is included in GDP.
d. GDP is unaffected because previously the rent payments were included in GDP and now
the rent payments are replaced in GDP by the estimate of the value of housing services.

5. Darla, a Canadian citizen, works only in the United States. The value of the output she produces
is
a. included in both U.S. GDP and U.S. GNP.
b. included in U.S. GDP, but it is not included in U.S. GNP.
c. included in U.S. GNP, but it is not included in U.S. GDP.
d. included in neither U.S. GDP nor U.S. GNP.

6. How is net national product (NNP) calculated?

a. Saving is subtracted from the total income of a nation’s citizens.
b. Saving is subtracted from the total income of a nation’s permanent residents.
c. Depreciation losses are subtracted from the total income of a nation’s citizens.

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d. Depreciation losses are subtracted from the total income of a nation’s permanent residents.

7. In the national income accounts, depreciation is called

a. "consumption of fixed capital."
b. "negative investment."
c. "capital taxation."
d. "loss due to wear."

8. Disposable personal income is the income that

a. households have left after paying taxes and non-tax payments to the government.
b. businesses have left after paying taxes and non-tax payments to the government.
c. households and noncorporate businesses have left after paying taxes and non-tax payments
to the government.
d. households and businesses have left after paying taxes and non-tax payments to the
government.

9. Household spending on education is included in

a. consumption, although it might be argued that it would fit better in investment.
b. investment, although it might be argued that it would fit better in consumption.
c. government spending, based on the fact that most higher-education students attend
publicly-supported colleges and universities.
d. None of the above is correct; in general, household spending on services is not included in
any component of GDP.

10. During the current quarter, a firm produces consumer goods and adds some of those goods to
its inventory rather than selling them. The value of the goods added to inventory is
a. not included in the current quarter GDP.
b. included in the current quarter GDP as investment.
c. included in the current quarter GDP as consumption.
d. included in the current quarter GDP as a statistical discrepancy.

11.If net exports is a negative number for a particular year, then

a. the value of firms’ inventories declined over the course of the year.
b. consumption exceeded the sum of investment and government purchases during the year.
c. the value of goods sold to foreigners exceeded the value of foreign goods purchased
during the year.
d. the value of foreign goods purchased exceeded the value of goods sold to foreigners
during the year.

12. In the economy of Wrexington in 2008, exports were $500, GDP was $6400, government
purchases were $1500, imports were $600, and investment was $2000. What was Wrexington’s
consumption in 2008?
a. $1800
b. $2800
c. $3000

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d. $4000

13. In the economy of Wrexington in 2008, consumption was $200, exports were $50, GDP was
$325, government purchases were $100, imports were $125, and investment was $100. What were
Wrexington’s net exports in 2008?
a. -$75
b. -$50
c. $50
d. $75

14. In the economy of Wrexington in 2008, consumption was $3000, GDP was $5500, government
purchases were $1000, imports were $2000, and investment was $1000. What were Wrexington’s
exports in 2008?
a. -$1500
b. $500
c. $1500
d. $2500

15. In the economy of Wrexington in 2008, consumption was $2000, exports were $800, GDP was
$4800, government purchases were $840, and investment was $1400. What were Wrexington’s
imports in 2008?
a. -$560
b. -$240
c. $240
d. $560

16. In the economy of Wrexington in 2008, nominal GDP was $18 billion and the GDP deflator was
120. What was Wrexington’s real GDP in 2008?
a. $6.7 billion
b. $15 billion
c. $21.6 billion
d. $38 billion

17. In the economy of Wrexington in 2008, nominal GDP was $10 trillion and real GDP was $4
trillion. What was Wrexington’s GDP deflator in 2008?
a. 25
b. 40
c. 250
d. 400

18. In the economy of Wrexington in 2008, nominal GDP was $28 trillion and real GDP was $32
trillion. What was Wrexington’s GDP deflator in 2008?
a. 87.5
b. 114.3
c. 400

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d. 896

Table 23-6
The table below contains data for the country of Togogo. The base year is 1974.

Year Nominal GDP GDP Deflator

1974 $2000 100
1975 $3000 120
1976 $3750 150
1977 $6000 200

19. Refer to Table 23-6. Which of the following is not correct?

a. This economy experienced growth from 1974 to 1975.
b. This economy experienced growth from 1975 to 1976.
c. This economy experienced growth from 1976 to 1977.
d. This economy experienced inflation from 1974 to 1975, from 1975 to 1976, and from
1976 to 1977.

20. Many things that society values, such as good health, high-quality education, enjoyable
recreation opportunities, and desirable moral attributes of the population, are not measured as
part of GDP. It follows that
a. GDP is not a useful measure of society's welfare.
b. GDP is still a useful measure of society's welfare because providing these other attributes
is the responsibility of government.
c. GDP is still a useful measure of society's welfare because it measures a nation's ability to
purchase the inputs that can be used to help produce the things that contribute to welfare.
d. GDP is still the best measure of society's welfare because these other values cannot
actually be measured.

PROBLEMS

Problem 1

Suppose that an economy produces only three types of products: rice, milk and sugar. Quantity and price
data for these three products for two different years are shown in the table below:

Year Quantity of Price of Quantity of Price of Quantity of Price of

rice rice milk milk sugar sugar

2008 2,000 $2 700 $1 600 $1

2009 1,800 $3 800 $9 500 $5

Calculate nominal GDP for each year of this economy

Year Calculation Nominal GDP

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 2008

2009

Calculate the real GDP for each year (base year 2008)

Year Calculation Real GDP

2008

2009

Calculate the GDP deflator for each year (base year 2008)

Year Calculation GDP deflator

2008

2009

Calculate the percentage change of nominal GDP and real in 2009?

Calculation Growth rate

Nominal GDP

Real GDP

Did economic well-being rise or fall in 2009? If it falled, why we still see nominal GDP rising in that
year?

Problem 2

Identify the immediate effect of each of the following events on U.S. GDP and its components.

a. James receives a Social Security check.

b. John buys an Italian sports car.

c. Henry buys domestically produced tools for his construction company.

Problem 3

A farmer grows wheat, which he sells to a miller for $100. The miller turns the wheat into flour, which
she sells to a baker for $150. The baker turns the wheat into bread, which she sells to consumers for
$180. Consumers eat the bread.

a. What is GDP in this economy?

b. Value added is defined as the value of a producer’s output minus the value of the intermediate goods
that the producer buys to make the output. Assuming there are no intermediate goods beyond those
described above, calculate the value added of each of the three producers.
c. What us total value added of the three producers in this economy? How does it compare to the econ-
omy’s GDP? Does this example suggest another way of calculating GDP?

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