Econ Ch5 Review Quiz Answers

1. The gross domestic production of a country

• equals the income of its residents.
• is less than the income of its residents.
• is greater than the income of its residents.
• could be less than, equal to, or greater than the income of its residents.

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1. Refer to the Figure. Which of the following correctly identifies the flow of goods and services?

• K, M, L, and N
• C, D, M, and K
• A, B, C, and D
• A, L, N, and B

Feedback: The flow of goods and services is represented by the inside arrows.

1. GDP is defined as the:

• value of all goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.
• value of all final goods and services produced by domestic residents of a country in a given period of time.
• value of all goods and services produced by domestic residents of a country in a given period of time.
• value of all final goods and services produced by the citizens of a country, regardless of where they are living, in a given period of time.

1. The citizens of Denmark earn $300 million of income from abroad whereas citizens of other countries earn $500 million in Denmark. Therefore, Denmark's

• net factor payments from abroad are positive, and its GDP is larger than its GNP.
• net factor payments from abroad are negative, and its GNP is larger than its GDP.
• net factor payments from abroad are negative, and its GDP is larger than its GNP.
• net factor payments from abroad are positive, and its GNP is larger than its GDP.

Feedback:  Net factor payments from abroad = income earned by Danish citizens abroad (GNP) - income earned by foreign citizens in Denmark(GDP) = -$200 million. GNP = GDP + net factor payments from abroad. So GDP exceeds GNP by $200 million.

1. The residents of Ecuador earn $700 million of income from abroad. Residents of other countries earn $200 million in Ecuador. The earnings of Ecuadorian residents abroad are accounted for in Ecuador's

• GNP which is smaller than its GDP.
• GDP which is larger than its GNP.
• GNP which is larger than its GDP.
• GDP which is smaller than its GNP.

Feedback: GNP =GDP + net factor payments from abroad.

1. U.S. GDP and U.S. GNP are related as follows.

• GDP = GNP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad.
• GDP = GNP + Value of exported goods - Value of imported goods.
• GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad.
• GNP = GDP + Value of exported goods - Value of imported goods.

Feedback: GNP is production by U.S. factors of production wherever they are located. So, income earned by foreigners in the U.S. must be subtracted out and income earned by U.S. citizens abroad must be added.

1. Which of the following components of GDP include your tuition payments?

• Consumption of nondurable goods
• Consumption of services
• Consumption of durable goods
• Investment

1. Suppose a country has government purchases of $3,000, taxes of $2,000, consumption of $9,000, exports of $2,500, imports of $2,700, transfer payments of $750, capital depreciation of $800, and investment of $4,000. GDP equals

• $17,000.
• $15,800.
• $17,550.
• $16,000.

1. If an economy's income falls, then it must be the case that the economy's

• GDP fell and expenditures rose.
• GDP and expenditures both fell.
• GDP and saving both fell.
• GDP fell and its saving rose.

Feedback: GDP measures both income and expenditures so they must move in the same direction.

1. Tom lives in an apartment where he pays $8,000 a year in rent. Sarah lives in a house that could be rented for $10,000 a year. How much do these housing services contribute to GDP?

• $10,000
• $18,000
• $8,000
• $0

Feedback: GDP includes both rents and estimated rents of owner-occupied homes.

1. George lives in a home that was newly constructed in 2011 for which he paid $200,000.In 2014 he sold the house by himself for $250,000. Which of the following statements is correct regarding the sale of the house?

• The 2014 sale increased 2014 GDP by $250,000; furthermore, the 2014 sale caused 2011 GDP to be revised upward by $50,000.
• The 2014 sale affected neither 2014 GDP nor 2011 GDP.
• The 2014 sale increased 2014 GDP by $250,000 and had no effect on 2011 GDP.
• The 2014 sale increased 2014 GDP by $200,000 and had no effect on 2011 GDP.

Feedback: The value of sales of used goods affects neither current nor past GDP

1. Suppose an economy produces only eggs and ham. In 2015, 100 dozen eggs are sold at $4.50 per dozen and 50 pounds of ham sold at $3 per pound. In 2014, the base year, eggs sold at $3 per dozen and ham sold at $4 per pound. For 2015

• nominal GDP is $600, real GDP is $500, and the GDP deflator is 120
• nominal GDP is $600, real GDP is $500, and the GDP deflator is 83.3
• nominal GDP is $500, real GDP is $600, and the GDP deflator is 83.3
• nominal GDP is $500, real GDP is $600, and the GDP deflator is 120

Feedback: Nominal GDP uses current prices and quantities and so is 100 X $4.50 + 50 X $3.00 = $600. Real GDP uses base year prices and current quantities and so is 100 x $3.00 + 50 x $4.00 = $500. The GDP deflator is 100 x Nominal GDP/GDP Deflator = 100 x $600/$500 = 100 x 1.2 = 120.

1. International data on GDP and socioeconomic variables indicate that in countries with low levels of real GDP per person, socioeconomic variables indicating a better quality of life are

• mostly similar to those in countries with higher levels of real GDP per person.
• significantly higher about as often as they are significantly lower for those countries with higher levels of real GDP person.
• generally significantly higher than in countries with higher levels of real GDP per person.
• generally significantly lower than in countries with higher levels of real GDP per person.

Feedback: Real GDP per person and variables indicating a better quality of life are significantly and positively related.

1. A country with a higher level of real GDP per person necessarily has a higher standard of living than a country with a lower level of real GDP per person.

• True
• False

Feedback: Real GDP per person measures a country's economic well-being. However, other things such as environmental quality, freedoms, and the distribution of income also affect a country's standard of living.

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

• 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.
• The sum of wages, rents, and profits is less than a nation's income.
• Money continuously flows from households to firms and then back to households, but GDP does not measure this flow of money.
• GDP is generally not regarded as a measure of a society's economic well­being.

Feedback: GDP equals both a nation's income and expenditures, income is the flow of wages, rents, and profits from firms to households, and GDP is generally regarded as the best single measure of a society's well-being.

1. Which of the following is the way that Net National Product is calculated?

• Saving is added to the total income of a nation's citizens.
• Saving is subtracted from the total income of a nation's citizens.
• Depreciation losses are subtracted from the total income of a nation's citizens.
• Depreciation losses are added to the total income of a nation's citizens

1. A manufacturer produces 500,000 MP3 players in the first quarter of the year. It sells 400,000 of them and adds 100,000 of them to inventory. All the players added to inventory are purchased by consumers in the second quarter. How are the 100,000 that go into inventory counted in GDP?

• Since the MP3 players were purchased by consumers in the second quarter, they will be counted as an increase in second- quarter GDP.
• Since the MP3 players eventually will be bought by consumers, they will be included as consumption in the first quarter.
• The MP3 players will be counted as a change in inventory in the first quarter, and so will be included in first quarter GDP as part of investment.
• The MP3 players will be counted as a change in inventory in the first quarter, and when sold in the second quarter will raise GDP by the value of the MP3 players.

Feedback: The MP3 players that go into inventory will count as a change in inventory, part of investment spending, in the first quarter. In the second quarter they will count as consumption but the drop in inventory will reduce GDP by the same amount as consumption rises, so the purchases in the second quarter have no overall impact on GDP.

1. Real GDP will decrease

• only when production of goods and services decreases.
• only when prices decrease.
• only when production of goods and services and prices decrease.
• when prices decrease or output decreases.

Feedback: Real GDP uses prices from a base year, so real GDP reflects only changes in the production of goods and services.

1. Real GDP is

• adjusted for differences in leisure time, but not for differences in the quality of the environment
• adjusted for differences in leisure time and differences in the quality of the environment.
• adjusted for differences in the quality of the environment but not for differences in leisure time
• not adjusted for differences in leisure time, nor adjusted for the differences in the quality of the environment

Feedback: Real GDP does not make adjustment for differences in leisure time or environmental quality. It measures average income per worker with no adjustment for other things that may affect the quality of life.