Exercise 1

Chapter 7 GDP: Measuring Total Production and Income

7.1 Gross Domestic Product Measures Total Production
1) In May 2009, Ford Motor Company's sales were down 20 percent from a year
earlier. These events were caused by
A) an economic recession.
B) an economic expansion.
C) a reduction in advertising.
D) declining quality of service.
Answer: A
Diff: 2 Page Ref: 613/209
Topic: The Business Cycle
Objective: LO1: Explain how total production is measured.
Special Feature: Chapter Opener: Ford Motor Company Feels the Effects of the
Recession
2) During a business cycle expansion, total production ________ and total
employment ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 617/213
Topic: The Business Cycle
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
3) Macroeconomics, as opposed to microeconomics, includes the study of what
determines the
A) average price levels of goods and services in the economy.
B) price charged for laptop computers by Dell.
C) wages paid to employees by Dell.
D) quantity of Dell employees.
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 614/210
Topic: Macroeconomics vs. Microeconomics
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
4) Which of the following headlines would be more closely related to what
macroeconomists study than what microeconomists study?
A) Avocado prices rise due to a late frost in California.

B) The United Auto Workers sign a contract raising wages and benefits 7% over the
next 3 years.
C) Real GDP grows by 2.3% in the second quarter.
D) Airlines raise ticket prices in response to rising fuel costs.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 614/210
Topic: Macroeconomics vs. Microeconomics
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
5) Suppose, in 2010, you purchased a house built in 2003. Which of the following
would be included in the gross domestic product for 2010?
A) the value of the house in 2010 (the house is built in 2003, not current
production!!!)
B) the value of the house in 2003 (included in GDP for 2003, not 2010)
C) the value of the house in 2010 minus depreciation (same as (A))
D) the value of the services of the real estate agent (correct, the service is current
production)
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 615/211
Topic: Measuring Total Production
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
6) Which of the following goods is directly counted in GDP?
A) the lettuce that Subway purchases for its sandwiches
B) the bread that Subway purchases for its sandwiches
C) a 12-inch Subway sandwich purchased by a student
D) the plastic bags that Subway purchases to wrap its sandwiches
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 615/211
Topic: Final vs. Intermediate Goods
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
7) Which of the following is not directly counted in GDP?
A) investment expenditures
B) government purchases
C) intermediate goods
D) consumer goods
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 615/211
Topic: Final vs. Intermediate Goods

Objective: LO1: Explain how total production is measured.

AACSB: Reflective Thinking
Special Feature: None
8) Which of the following would be directly counted in GDP in 2010?
A) kitchen cabinets purchased from Home Depot in 2010 to be installed in a house
built in 1997 (correct, even if this house was built during prehistory period)
B) kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a
brand new country-style home (not current production)
C) kitchen cabinets built in 1887, extracted from the 1887 home, and installed in a
farm house built in 1950 (same as (B))
D) none of the above
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 615/211
Topic: Measuring Total Production
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
Table 7-2
Product
Shoes
DVDs
Tomatoes
Ketchup

Quantity
40
100
2,000
300

Price
$60.00
18.00
1.00
4.00

9) Refer to Table 7-2. Suppose that a simple economy produces only four goods and
services: shoes, DVDs, tomatoes, and ketchup. Assume one half of the tomatoes are
used in making the ketchup and the other half of the tomatoes are purchased by
households. Using the information in the above table, nominal GDP for this simple
economy equals
A) $7,400.
B) $6,400. (Assume one half of the tomatoes are used in making the ketchup and the
other half of the tomatoes are purchased by households.)
C) $5,800.
D) 2,440 units.
Answer: B
Diff: 2 Page Ref: 616/212
Topic: Measuring Total Production
Objective: LO1: Explain how total production is measured.
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating GDP
10) Which of the following is not an example of a transfer payment?
(Payments by the government to individuals for which the government does not
receive a new good or service in return. [not included in GDP] These payments
include social security payments to retired and disabled people and unemployment
insurance payments to unemployed workers.)

A) unemployment insurance payments

B) health insurance payments to an army private (receive health service in return)
C) social security payments to retirees
D) social security payments to disabled persons
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 618/214
Topic: Measuring Total Production
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
11) Which of the following is not a durable good?
A) furniture
B) automobile
C) clothing (nondurable???)
D) refrigerator
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 618-619/214-215
Topic: Components of GDP
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
12) Investment, as defined by economists, would include the purchase of a
(Investment in economists minds is much narrower than everyday use. It is reserved
for the purchases of machinery, factories, and houses. Economists dont include
purchase of stock or bond in investment because those activities do not result in
production of new goods and services.)
A) corporate bond.
B) government bond.
C) share of stock in ExxonMobil.
D) computer by an accounting firm.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 618-619/214-215
Topic: Components of GDP
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
13) To calculate GDP by the expenditure method, one must add
A) wages, rents, interest, and profits.
B) consumption spending, investment spending, government spending and net
exports.
C) consumption spending, investment spending, government spending and exports.
D) labor, natural resources, entrepreneurship, and capital.
Answer: B
Comment: Recurring

Diff: 1 Page Ref: 619-620/215-216

Topic: Measuring Total Production
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
14) The purchase of a new house is included in
A) consumption expenditures.
B) investment expenditures.
C) government purchases.
D) net exports.
Answer: B
Comment: Recurring
Diff: 1 Page Ref: 618-619/214-215
Topic: Components of GDP
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
15) The purchase by a foreign government of an airplane produced in the United
States is included in U.S.
A) consumption expenditures.
B) investment expenditures.
C) government purchases.
D) net exports.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 618-619/214-215
Topic: Components of GDP
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
16) In 2008, which component of GDP had a negative value?
A) consumption
B) investment
C) government spending
D) net exports
Answer: D
Diff: 1 Page Ref: 618-619/214-215
Topic: Components of GDP
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
17) In the United States since the mid-1980s, consumption as a percentage of GDP
has
A) increased.
B) slowly decreased.
C) remained the same.
D) dropped by more than half.

Answer: A
Diff: 1 Page Ref: 620-622/216-218
Topic: Components of GDP
Objective: LO1: Explain how total production is measured.
Special Feature: Making the Connection: Will U.S. Consumers Be Spending Less?
18) In March 2009, automobile sales in the United States fell 35 percent from the
previous month. The decrease in auto sales impacts GDP because new automobiles
are counted as ________ when purchased by households and ________ when
purchased by businesses.
A) nondurable goods; durable goods
B) consumption; investment
C) investment; consumption
D) durable goods; nondurable goods
Answer: B
Diff: 2 Page Ref: 632/228
Topic: Components of GDP
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: An Inside LOOK at Policy: Falling Auto Purchases Lead to Lower
GDP
Table 7-3
Consumption expenditures $800
Investment expenditures
200
Government purchases
300
Exports
100
Imports
200
Wages (should be excluded) 800
19) Refer to Table 7-3. Consider the data above (in billions of dollars) for an
economy: Gross domestic product (in billions of dollars) for this economy equals
A) $2,200.
B) $1,600.
C) $1,400.
D) $1,200.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 619-620/215-216
Topic: Components of GDP
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
20) Which of the following is not true about the composition of GDP in 2008?
A) The majority of consumer spending is on durable goods.
B) Purchases made by state and local governments are greater than purchases made
by the federal government.
C) Imports are greater than exports.

D) Business fixed investment is the largest component of investment.

Answer: A
Diff: 2 Page Ref: 618-619/214-215
Topic: Components of GDP
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
Table 7-5
Stage of Production
1
2
3

Seller
Steel mill
Auto manufacturer
Auto dealer

Buyer
Auto manufacturer
Auto dealer
Consumer

Price
$10,000
18,000
25,000

Consider the table above showing three stages of production of an automobile.

21) Refer to Table 7-5. The value added by the automobile dealer equals
A) $7,000. (25,000-18,000, valued added by dealer. Selling price in current stage of
production minus that in previous stage of production.)
B) $15,000. (25,000-10,000??? does not make sense)
C) $18,000. (value of the car for manufacturer, not added value)
D) $25,000. (value of the car for dealer, not added value by auto dealer)
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 622/218
Topic: Measuring GDP by the Value Added Method
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
22) Refer to Table 7-5. The value of each automobile in gross domestic product
equals (selling price in the final stage of production!!!, i.e. selling price for dealer)
A) $7,000. (value added)
B) $15,000. (does not make sense)
C) $18,000. (not selling price in the final stage of production)
D) $25,000.
Answer: D
Comment: Recurring
Diff: 2 Page Ref: 622/218
Topic: Measuring GDP by the Value Added Method
Objective: LO1: Explain how total production is measured.
AACSB: Analytic Skills
Special Feature: None
23) 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?
Answer: We would double count if we counted directly the value of intermediate
goods and services, because their value shows up in the value of the final goods and

services in which they are a part.

Comment: Recurring
Diff: 2 Page Ref: 615/211
Topic: Measuring Total Production
Objective: LO1: Explain how total production is measured.
AACSB: Reflective Thinking
Special Feature: None
Table 7-7
Product
Sweaters
CDs
Sugar
Soft drinks

Quantity
50
150
600
800

Price
$50.00
10.00
1.00
0.75

24) Refer to Table 7-7. 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.
Answer: Nominal GDP equals (50 $50) + (150 $10) + ((600 .5) $1)) + (800
0.75) = $4,900.
Diff: 3 Page Ref: 619-620/215-216
Topic: Measuring Total Production
Objective: LO1: Explain how total production is measured.
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating GDP
7.2 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.
Answer: D
Diff: 2 Page Ref: 613/209
Topic: Shortcomings in GDP as a Measure of Total Production
Objective: LO2: Discuss whether GDP is a good measure of well-being.
AACSB: Reflective Thinking
Special Feature: Economics in YOUR LIFE!: What's the Best Country for You to
Work In?
2) 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.
Answer: A
Comment: Recurring
Diff: 1 Page Ref: 623/219
Topic: Shortcomings in GDP as a Measure of Total Production
Objective: LO2: Discuss whether GDP is a good measure of well-being.
AACSB: Reflective Thinking
Special Feature: None
3) 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.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 623/219
Topic: Shortcomings in GDP as a Measure of Total Production
Objective: LO2: Discuss whether GDP is a good measure of well-being.
AACSB: Reflective Thinking
Special Feature: None
4) 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.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 623/219
Topic: Shortcomings in GDP as a Measure of Total Production
Objective: LO2: Discuss whether GDP is a good measure of well-being.
AACSB: Reflective Thinking
Special Feature: None
5) Which of the following statements is true?
A) A decrease in the crime rate increases GDP as people will spend more on security.
(spend less on security)
B) Household production is counted in GDP as it amounts to real production.
(household production is not counted, one of shortcomings of GDP)
C) GDP accounting rules do not adjust for production that pollutes the economy.

D) GDP growth distributes income equally to people in the economy. (GDP may not
be a good measure of how pie is divided up.)
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 623/219
Topic: Shortcomings in GDP as a Measure of Total Production
Objective: LO2: Discuss whether GDP is a good measure of well-being.
AACSB: Reflective Thinking
Special Feature: None
6) 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.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 623/219
Topic: Shortcomings in GDP as a Measure of Total Production
Objective: LO2: Discuss whether GDP is a good measure of well-being.
AACSB: Reflective Thinking
Special Feature: None
7) Increases in real GDP would overstate the increase in the well-being of a country
over time if, over that time period, the
(In other words, which of the followings implies a decrease in well-being?)
A) average hours worked per week increased. (less leisure)
B) amount of pollution decreased. (better off)
C) price level increased. (real GDP only uses base year price level)
D) crime rate decreased. (better off)
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 623/219
Topic: Shortcomings in GDP as a Measure of Total Production
Objective: LO2: Discuss whether GDP is a good measure of well-being.
AACSB: Reflective Thinking
Special Feature: None
8) Increases in real GDP would understate the well-being of a country over time if,
over that time period, the
(In other words, which of the followings implies an increase in well-being?)
A) crime rate increased. (worse off)
B) percentage of people addicted to illegal drugs increased. (worse off)
C) amount of pollution decreased. (better off)
D) average hours worked per week decreased. (better off)

Answer: C D
Comment: Recurring
Diff: 2 Page Ref: 624-625/220-221
Topic: Shortcomings in GDP as a Measure of Well-Being
Objective: LO2: Discuss whether GDP is a good measure of well-being.
AACSB: Reflective Thinking
Special Feature: None
7.3 Real GDP versus Nominal GDP
1) Nominal GDP is GDP in a given year
A) adjusted for inflation.
B) adjusted for anticipated inflation.
C) valued in the prices of that year.
D) valued in the prices of the base year.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 626-627/222-223
Topic: Real GDP versus Nominal GDP
Objective: LO3: Discuss the difference between real GDP and nominal GDP.
AACSB: Reflective Thinking
Special Feature: None
Table 7-8
Year
2002
2009

Guns
Produced
80
90

Butter
Price of Guns Produced
$5
40
6
60

Price
Butter
$4
10

of

Consider the following data for Tyrovia, a country that produces only two products:
guns and butter.
2) Refer to Table 7-8. Real GDP for Tyrovia for 2009 using 2002 as the base year
equals
A) $1,140.
B) $880.
C) $690.
D) $560.
Answer: C
Diff: 2 Page Ref: 627/223
Topic: Calculating Real GDP
Objective: LO3: Discuss the difference between real GDP and nominal GDP.
AACSB: Analytic Skills
Special Feature: Solved Problem: Calculating Real GDP
Table 7-9
Year

Nominal
GDP

Real GDP

2006
$7,400
2007
(base)
7,813
2008
8,301
2009
8,760

$7,537
7,813
8,165
8,516

3) Refer to Table 7-9. Consider the following data on nominal GDP and real GDP
(values are in billions of dollars): The base year used in calculating real GDP is
(In the base year, real GDP = nominal GDP)
A) 2006.
B) 2007.
C) 2008.
D) 2009.
Answer: B
Comment: Recurring
Diff: 2 Page Ref: 626-627/222-223
Topic: Calculating Real GDP
Objective: LO3: Discuss the difference between real GDP and nominal GDP.
AACSB: Reflective Thinking
Special Feature: None
Table 7-10
Year
2007
2009

Oranges
Produced
1,800
2,000

Price
Oranges
$0.90
1.00

ofShirts
Produced
110
110

Price
Shirts
$30.00
35.00

of

Consider the data shown above for Vicuna, a country that produces only two products:
oranges and shirts.
6) Refer to Table 7-10. Real GDP for Vicuna for 2007 using 2009 as the base year
equals
A) $4,620.
B) $5,100.
C) $5,650.
D) $5,850.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 626-627/222-223
Topic: Calculating Real GDP
Objective: LO3: Discuss the difference between real GDP and nominal GDP.
AACSB: Analytic Skills
Special Feature: None
7) Refer to Table 7-10. Nominal GDP for Vicuna for 2007 equals
A) $4,920.
B) $5,100.
C) $5,300.
D) $5,850.

Answer: A
Comment: Recurring
Diff: 2 Page Ref: 626-627/222-223
Topic: Measuring Total Production
Objective: LO3: Discuss the difference between real GDP and nominal GDP.
AACSB: Analytic Skills
Special Feature: None
8) To examine how the total production of an economy has changed over time, it
would be better to examine
A) real GDP.
B) nominal GDP.
C) GDP at current prices.
D) the GDP deflator.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 626-627/222-223
Topic: Real GDP versus Nominal GDP
Objective: LO3: Discuss the difference between real GDP and nominal GDP.
AACSB: Reflective Thinking
Special Feature: None
9) Real GDP will increase
(Real GDP holds price level constant, making it a better measure of total production
and income. Indeed, economic growth is almost always measured by the real GDP
growth. If a headline in Wall Street Journal states, U.S. economy grew 5% last year,
it means that U.S. real GDP increases by 5% during the previous year.)
A) only if the price level rises. (Real GDP holds price level constant)
B) only if the price level falls. (Real GDP holds price level constant)
C) only if the quantity of final goods and services produced rises.
D) if either the price level rises or the quantity of final goods and services produced
rises. (Real GDP holds price level constant)
Answer: C
Comment: Recurring
Diff: 3 Page Ref: 627-628/223-224
Topic: Real GDP versus Nominal GDP
Objective: LO3: Discuss the difference between real GDP and nominal GDP.
AACSB: Reflective Thinking
Special Feature: None

10) The GDP deflator is the

A) difference between real GDP and nominal GDP multiplied by 100.
B) difference between nominal GDP and real GDP multiplied by 100.
C) ratio of real GDP to nominal GDP multiplied by 100.
D) ratio of nominal GDP to real GDP multiplied by 100.
Answer: D
Comment: Recurring
Diff: 1 Page Ref: 628-629/224-225

Topic: The GDP Deflator

Objective: LO3: Discuss the difference between real GDP and nominal GDP.
AACSB: Reflective Thinking
Special Feature: None
11) The GDP deflator is a measure of the
A) total production of the economy adjusted for inflation.
B) total production of the economy unadjusted for inflation.
C) average level of prices of final goods and services in the economy.
D) average level of prices of intermediate goods and services in the economy.
Answer: C
Comment: Recurring
Diff: 1 Page Ref: 628-629/224-225
Topic: The GDP Deflator
Objective: LO3: Discuss the difference between real GDP and nominal GDP.
AACSB: Reflective Thinking
Special Feature: None
12) The GDP deflator in year 2 is 105, using year 1 as the base year. This means that,
on average, the cost of goods and services is
A) 5% higher in year 2 than in year 1.
B) 105% higher in year 2 than in year 1.
C) 5% higher in year 1 than in year 2.
D) 105% higher in year 1 than in year 2.
Answer: A
Comment: Recurring
Diff: 2 Page Ref: 628-629/224-225
Topic: The GDP Deflator
Objective: LO3: Discuss the difference between real GDP and nominal GDP.
AACSB: Analytic Skills
Special Feature: None
Table 7-11
Year
2007
2008

Nominal
GDP
14,078
14,441

Real GDP
13,254
13,312

13) Refer to Table 7-11. Consider the following data on nominal GDP and real GDP
(values are in billions of dollars): The GDP deflator for 2008 equals
A) 92.2.
B) 102.6.
C) 108.5.
D) 109.1.
Answer: C
Comment: Recurring
Diff: 2 Page Ref: 628-629/224-225
Topic: The GDP Deflator
Objective: LO3: Discuss the difference between real GDP and nominal GDP.

AACSB: Analytic Skills

Special Feature: None
14) If the GDP deflator is equal to 100, then for that year nominal GDP is equal to
real GDP
Answer: TRUE
Comment: Recurring
Diff: 1 Page Ref: 627-628/223-224
Topic: The GDP Deflator
Objective: LO3: Discuss the difference between real GDP and nominal GDP.
AACSB: Reflective Thinking
Special Feature: None