CHAPTER 23: MEASURING A NATIONS INCOME

TEST
1. Which of the following is not a question addressed by macroeconomists?
a. Why is average income high in some nations but low in others?
b .What, if anything, can the government do to promote growth in incomes, low
inflation, and stable employment?
c. What is the impact of foreign competition on VN auto industry?
d. Why do production and employment expand in some years and contract in
others?

2. Which of the following statistics is usually regarded as the best single

measure of a society’s economic well-being?
a. the unemployment rate
b. the inflation rate
c. gross domestic product
d. the trade deficit

3. For an economy as a whole,

a. the market value of production must equal expenditure.
b. investment must equal the value of stocks and bonds purchased.
c. wages must equal income.
d. consumption must equal saving.

4. Which of the following statements about GDP is correct?

a. GDP measures two things at once: the total income of everyone in the economy
and the total expenditure on the economy’s output of goods and services.
b. Money continuously flows from households to firms and then back to
households, and GDP measures this flow of money.
c. GDP is generally regarded as the best single measure of a society’s economic
well-being.
d. All of the above are correct.

5. For an economy as a whole, income must equal expenditure because

a. the number of firms is equal to the number of households in an economy.
b. individuals can only spend what they earn each period.
c. every dollar of spending by some buyer is a dollar of income for some seller.
d. every dollar of saving by some consumer is a dollar of spending by some other
consumer.

6. If an economy’s GDP rises, then it must be the case that the economy’s
a. income rises and saving falls.
b. income and saving both rise.
c. income rises and expenditure falls.
d. income and expenditure both rise.

7. In the actual economy, households

a. spend all of their income.
b. divide their income among spending, taxes, and saving.
c. buy all goods and services produced in the economy.
d. Both (a) and (c) are correct.

8. According to the circular-flow diagram GDP

a. can be computed as either the revenue firms receive from the sales of goods and
services or the payments they make to factors of production.
b. can be computed as the revenue firms receive from the sales of goods and
services but not as the payments they make to factors of production.
c.can be computed as payments firms make to factors of production but not as
revenues they receive from the sales of goods and services.
d. cannot be computed as either the revenue firms receive or the payments they
make to factors of production.

9. Which of the following is a way to compute GDP?

a. total income earned.
b. total expenditures on final goods.
c. add up the market values of all final goods and services.
d. All of the above are correct.

10. Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby
makes two sweaters, each of which has a market price of $40. Collette buys
one of them, while the other remains on the shelf of Barnaby’s store to be sold
later. What is GDP here?
a. $40
b. $60
c. $80
d. $100
Solution:
1. Angus sells wool to Barnaby for $20.
2. Barnaby produces two sweaters with the wool, each selling for $40.
3. Collette buys one sweater for $40.
The GDP is calculated by summing up the market value of all final goods and services. In this
case, Barnaby's production of sweaters contributes to GDP, and since both sweaters are sold to
consumers during the period, the total market value of the sweaters sold is $80 ($40 + $40).

11+13. If all quantities produced rise by 10 percent and all prices fall by 10
percent, which of the following occurs?
a. Real GDP rises by 10 percent, while nominal GDP falls by 10 percent.
b. GDP rises by 10 percent, while nominal GDP is unchanged.
c. Real GDP is unchanged, while nominal GDP rises by 10 percent.
d. Real GDP is unchanged, while nominal GDP falls by 10 percent.

12. A country produces only ice cream and pie. Quantities and prices of these
goods for the last several years are shown below. The base year is 2008.
Yea Price of Ice Cream Quantity of Ice Cream Price of Pie Quantity of
r Pie

2008 $2.50 40 $5.00 20

2009 $3.00 50 $6.00 25

2010 $4.00 40 $6.00 30

In 2009, this country’s

a. real GDP was $250, and the GDP deflator was 125.
b. real GDP was $250, and the GDP deflator was 120.
c.real GDP was $240, and the GDP deflator was 125.
d .real GDP was $240, and the GDP deflator was 120.

14. A recession has traditionally been defined as a period during which

a. nominal GDP declines for two consecutive quarters.
b. nominal GDP declines for four consecutive quarters.
c. real GDP declines for two consecutive quarters.
d. real GDP declines for four consecutive quarters.

15. GDP does not reflect

a. the value of leisure.
b. the value of goods and services produced at home.
c. the quality of the environment.
d. All of the above are correct.
16. Suppose that twenty five years ago a country had nominal GDP of $1,000,
a GDP deflator of 200, and a population of 100. Today it has nominal GDP of
$3,000, a GDP deflator of 400, and population of 150. What happened to the
real GDP per person?
a. It more than doubled.
b. It increased, but it less than doubled.
c. It was unchanged.
d. It decreased.

Solution: First, let's understand the terms:

 Nominal GDP: The total value of all goods and services produced in a country in a
specific time period, measured in current prices.
 GDP Deflator: A measure of the level of prices of all new, domestically produced, final
goods and services in an economy.
 Real GDP: Nominal GDP adjusted for inflation. It's calculated by dividing the nominal
GDP by the GDP deflator and multiplying by 100.
To find the real GDP per person, we need to calculate the real GDP first and then divide it by the
population.
Calculation
25 years ago:
Real GDP = (Nominal GDP / GDP Deflator) * 100
Real GDP = (1000 / 200) * 100 = 500
Real GDP per person = Real GDP / Population
Real GDP per person = 500 / 100 = 5
Today:
Real GDP = (Nominal GDP / GDP Deflator) * 100
Real GDP = (3000 / 400) * 100 = 750
Real GDP per person = Real GDP / Population
Real GDP per person = 750 / 150 = 5
Conclusion
Comparing the real GDP per person from 25 years ago and today, we can see that it did not
change. So, the correct answer is:
a. It did not change.
17. GDP is $10 million, consumer spending is $6 million, government spending
is $3 million, exports are $2 million, and imports are $3 million. How much is
spent for investments?
a. $1 million
b. $2 million
c. $3 million
d. $4 million

Solution: (GDP = C + I + G + (X - M). This would mean that 10 = 6 + I + 3 + (2 - 3); therefore,

I = $2 million.)
18. The country of Hykania does not trade with any other country. Its GDP is
$20 billion. Its government purchases $3 billion worth of goods and services
each year, collects $3 billion in taxes, and provides $2 billion in transfer
payments to households. Private saving in Hyrkania is $4 billion. What is
investment in Hyrkania?
a. $2 billion
b. $4 billion
c. $3 billion
d. There is not enough information to answer the question.

Solution: The equilibrium GDP (Y) in an economy is computed as, Y = C + I + G.

The disposable income (Yd) for Hykania can be computed as,
Yd = GDP - Taxes + Transfer payments
Yd = $20 billion - $3billion + $1 billion
Yd = $18 billion
The consumption (C) in Hykania can be computed as,
C = Yd - Savings (S)
C = $18 billion - $4 billion
C = $14 billion
Substituting these values in the equation for computing GDP, the value for investment is
computed as, Y = C + I + G
$20 billion = $14 billion + I + $3 billion
I = $3 billion.
19. Which of the following transactions would be counted in GDP?
a. The wage you receive from babysitting your neighbor’s kids
b. The sale of illegal drugs
c. The resale of a sweater you received from your great aunt at Christmas that you
never wore on eBay
d. The sale of a pound of tomatoes at a supermarket

20. If an economy’s GDP falls, then it must be the case that the economy’s
a. income and saving fall.
b. income and market value of all production both fall.
c. income falls and market value of all production rises.
d. income rises and market value of all production falls.