CHAPTER 23: MEASURING A NATION’S INCOME
True/False
Indicate whether the statement is true or false.
?1.The circular flow diagram describes all transactions between households and firms in a ?simple economy and shows the equality of expenditures and income. ANSWER:? T POINTS:?
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?2.Gross domestic product includes most items produced and sold illicitly. ?ANSWER:? F POINTS:?
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?3.Net national product is the total income of a nation’s residents minus losses from ?depreciation. ANSWER:? T POINTS:?
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?4.Disposable personal income is the income that households and unincorporated business have ?left after satisfying all their obligations to the government. It equals personal income
minus personal taxes and certain non-tax payments to government. ANSWER:? T POINTS:?
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?5.The purchase of new houses by households is included in the calculation of personal ?consumption expenditures of GDP. ANSWER:? F POINTS:?
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Multiple Choice
Identify the choice that best completes the statement or answers the question.
?1.When GDP falls,
?a. income and expenditure must both fall. b. income and expenditure can both rise.
c. income must fall, but expenditure may rise or fall. d. expenditure must fall, but income may rise or fall. ANSWER:? A POINTS:?
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?2.Income equals expenditure because
?a. firms always pay out all their revenue as income to someone. b. each time a sale is made, there is a buyer and a seller. c. households own the factors of production used to generate incomes. d. All of the above are correct. ANSWER:? B POINTS:?
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?3.If a province makes the production and sale of illicit drugs legal, then GDP ?a. must increase. b. must decrease.
c. wouldn't change. d. may increase or decrease. ANSWER:? A POINTS:?
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?4.When a government provides subsidies to encourage growth of small businesses, the subsidies ?would
a. be included in GDP because they are invested by businesses. b. be included in GDP because they are a form of government spending. c. not be included in GDP because they are transfer payments.
d. may or may not be included in GDP, depending on how the funds are used. ANSWER:? C POINTS:?
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?5.Diesel fuel is
?a. always considered a final good.
b. counted as an intermediate good if a company uses it to provide transportation
services.
c. counted as a final good if a farmer uses it to run a tractor to grow crops. d. Both b and c are correct. ANSWER:? B POINTS:?
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?6.Gross domestic product
?a. is the market value of all final goods and services produced within a country in
a given period (usually a year)
b. is the income in the hands of individuals after deducting income taxes; income
available to households to spend and save
c. is the value of goods and services purchased by all levels of government— federal,
provincial, and local—in a given period
d. is the market value of all final goods and services produced by permanent residents
of a nation in a given time period ANSWER:? A POINTS:?
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?7.Macroeconomics is that branch of economics that studies ?a. the conditions of individual markets
b. the influence of governments on individual markets c. economy-wide phenomena
d. only the private sector of the economy ANSWER:? C POINTS:?
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?8.Suppose that nominal GDP is $6,000 billion and real GDP is $3,000. What is the GDP price ?deflator? a. 125 b. 150 c. 200 d. 250 ANSWER:? C
POINTS:?
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?9.The purchase of final goods and services by households is called ?a. investment
b. public sector expenditure c. consumption d. net exports ANSWER:? C POINTS:?
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?10Investment is the purchase of capital equipment, inventories, and .?a. structures b. non-durable goods c. depreciation d. import investment ANSWER:? A POINTS:?
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?11Transfer payments
.?a. are included in GDP because they are forms of income
b. are included in GDP because goods and services have been produced in the transfer c. are NOT included in the GDP because goods and services have not been produced in
the transfer
d. are included in GDP because they represent the production of transfers of goods
and services to foreign countries ANSWER:? C POINTS:?
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?12Which of the following would be considered consumption expenditure? .?a. The Smiths buy a home built in 1990.
b. The federal government pays the salary of a captain in the Armed Forces. c. The Hostlers buy a new car that was manufactured in Germany. d. The government buys food for its armed forces. ANSWER:? C POINTS:?
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?13The method that measures GDP in relationship to the size of the population is called .?a. GNP b. worker GDP c. GDP per person d. capital GDP ANSWER:? C POINTS:?
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?14The components of GDP are .?a. C + I + G b. NX + G + C c. C + G + NX d. C + I + G + NX ANSWER:? D POINTS:?
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?15Suppose nominal GDP is $7700 and the GDP deflator is 110. Real GDP is
.? a. $7700 b. $7000 c. $847,000 d. $8470 ANSWER:? B POINTS:?
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Short Answer
?1.What are the components of gross domestic product (GDP)? ?RESPONSE:? ANSWER:?
The components of GDP are: (1) consumption spending by households on goods and services, with the exception of purchases of new housing; (2) Investment spending on capital equipment, inventories, and structures, including household purchases of new housing; (3) government purchases or spending on goods and services by the local, provincial, and federal levels governments; and (4) net exports which is spending on domestically produced goods and services by foreigners (exports) minus spending on foreign goods and services by domestic resident (imports).
POINTS:?
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?2.Differentiate between gross domestic product (GDP) and gross national product (GNP). ?RESPONSE:? ANSWER:?
GDP is the value of all final goods and services produced within a country in a given year; while GNP is the total income earned by a nation’s permanent residents or nationals (that is, Canadians). GNP differs from GDP by including income that citizens of the nation (Canada) earned aboard, and excluding income that foreigners earn in the particular country . in Canada).
POINTS:?
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?3.Differentiate between real GDP and nominal GDP. ?RESPONSE:? ANSWER:?
Nominal GDP is the value of all final goods and services produced within a country in a year and valued at current prices; and real GDP is the GDP valued at constant base year prices.? Real GDP is not affected by changes in the level of prices, so it reflects only changes in the amounts being produced.
POINTS:?
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?4.Explain why GDP is not considered a perfect measure of well- being? ?RESPONSE:? ANSWER:?
GDP is not considered a perfect measure of well-being because some of the factors that contribute to a good life are omitted.? These would include: leisure time, the quality of the environment, the distribution of income, and the production of goods and services that did not pas through the market (for example, housework done by the homemaker, and volunteer work)
POINTS:?
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?5.How do economists measure economic growth? ?RESPONSE:? ANSWER:?
Economists measure economic growth as the percentage change in real GDP from one period to another. This is because changes in real GDP reflect only changes
in the amounts being produced.
POINTS:?
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CHAPTER 24: MEASURING THE COST OF LIVING
True/False
Indicate whether the statement is true or false.
?1.The GDP deflator reflects the prices of goods and services bought by consumers,?and the
? consumer price index reflects the price of all final goods and services produced domestically. ANSWER:? F POINTS:?
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?2.The consumer price index compares the price of a fixed basket of goods and services to the
? price of the basket in the base year. On the other hand, the GDP deflator compares the price of currently produced goods and services to the price of the same goods and services in the base years. ANSWER:? T POINTS:?
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?3.Indexation refers to the automatic correction of a dollar amount for the effects of inflation
? by law or contract. ANSWER:? T POINTS:?
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?4.Long term contracts between firms and unions will sometimes include partial or complete
? indexation of the wage to the consumer price index. This is called a cost-of-living allowance clause. ANSWER:? T POINTS:?
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?5.The core inflation rate is the consumer price index with the exclusion of the most volatile
? components such as energy and food. ANSWER:? T POINTS:?
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Multiple Choice
Identify the choice that best completes the statement or answers the question.
?1.In the CPI, goods and services are weighted according to
? a. how much a typical consumer buys of each item. b. whether the items are necessities or luxuries.
c. how much of each item is produced in the domestic economy. d. how much is spent on them in the national income accounts. ANSWER:? A POINTS:?
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?2.By not taking into account the possibility of consumer substitution, the CPI
? a. understates the standard of living. b. overstates the cost of living.
c. neither overstates nor understates the cost of living.
d. doesn't accurately reflect the cost of living, but it is unclear if it overstates
or understates the cost of living. ANSWER:? B POINTS:?
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?3.If the prices of Brazilian-made shoes imported into Canada increases, then
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