Calculating Gross Domestic Product

Unit Two Exam

1. Name and describe two ways of calculating gross domestic product.
2. Some items are not counted in GDP for various reasons. Identify three categories that are not counted and explain why they are excluded.

Answer:

1. Two ways GDP is calculated include the Expenditures approach, and the Income approach. The expenditure approach measures the total expenditures in an economy. The income approach measures the total expenditures in an economy. The formula for the expenditure approach is C+I+G+(X-M). The formula for the income approach is W+R+i+PR.
2. Items like the black market, social security payments, and exchanges in stocks and bonds are all not counted in the GDP calculation, because they don’t pass through regular market channels. This makes it very difficult to actually measure the true GDP of a country because every nation invests heavily in one or more of these categories.

2. The table above shows the number of side orders each chef can create during the lunch hour. The opportunity cost of a bowl of soup prepared by Chef Winflee is: A (7 salads)

3. Given a normal market demand curve for airline tickets, if airlines decrease the price of tickets from Detroit to Orlando, then there is a/an: C (increase in quantity demanded of airline tickets from Detroit to Orlando)

4. Given the normal market demand curve for airline travel, if airline pilots get a raise in pay, then there is a/an: B (decrease in supply of airline tickets)

5. In the circular flow diagram: A (goods and services flow from businesses to households through the product market

6. In the circular flow diagram: E (households pay taxes to government directly to the government)

7. In the circular flow diagram, tax revenues flow from: E (households to the government)

8. Which of the following would generate an increase in GDP for the USA: D (A tractor purchased by a Canadian citizen living in the United States)

9. Which of the following would generate a decrease in U.S. GDP: D (The purchase of souvenirs from South America by a vendor in Florida)

10. GDP would include all of the following except: C (tips earned but not reported by a waitress at an upscale restaurant)

11. Goods that are produced but not sold during a given time period: D (increase business inventories but leave GDP unchanged)

12. The purchase of 100 shares of stock in Nabisco for $50,000 is: E (excluded from GDP)

13. As opposed to GDP, GNP is a measure of all: E (final goods and services produced by a nation’s citizens)

14. Assume that consumer spending increased by $4 billion while business production aimed at consumers increased by $6 billion last year. As a result of these changes, GDP would: D (increase by $6 billion)

15. Gross Domestic Product (GDP) can be defines as:
16. The sum of all incomes while adjusting for indirect business taxes and foreign incomes
17. The market value of goods and services sold in an economy in some time period

• The total market value of final goods and services produced in an economy in some time period

E (I and III only)

16. The consumer price index (CPI) is a measure of: B (the price of consumer goods and services purchased by the average consumer in the current period relative to their price in some base period)

17. If the Producer’s Price Index changes from 100 to 90, economists will know that: A (inflation is decreasing in the economy)

18. If inflation in the United States was 4 percent, prices would double in approximately: C (17.5 years)

19. In 2000, a hamburger, fries and a soda cost the average consumer $1.25. In 2007, that same meal cost $1.50. The rate of inflation is approximately: D (20%)

20. If the normal interest rate was 8% in 2008 and inflation was 2%, then the real interest rate was: C (6%)

21. If CPI equals 110 in 2009 and 105 in 2010, then: E (the average price of goods and services has decreased)

22. The real interest rate can be found by: B (subtracting the inflation rate from the nominal interest rate)

23. If the nominal GDP was $2,700 billion in 2005 and real GDP was $1,800 billion, then the GDP deflator was approximately: E (150.0)

24. Rick, a teacher at Rydel High, is not working because his school is not open during the summer. This is an example of: E (an employed individual)

25. Which of the following may cause a decline in structural unemployment?

1. Unemployment payments decrease
2. The government provides new job training programs

• Job relocation services are provided

D (II and III only)

26. Judy lost her job at a worldwide cable company because customers switched to Skynet satellite and Judy is not skilled in working with satellite television services. This is an example of: C (structural unemployment)

27. If the working-age population was 280 million of the 350 million people living in the United States and the labor force was 250 million with an unemployment rate of 6%, the number of employed workers would be: D (235 million workers)

28. Wendy graduated from high school and decided not to go to college. She has no skills and is having trouble finding a job. This is an example of: C (structural unemployment)

29. Which of the following is an example of cyclical unemployment: E (Jerry lost his job as an insurance representative because sales are down all over the city)

30. When describing the four phases of the business cycle, the economy goes from: C (a peak to recession to a trough, into expansion and back to a peak)

31. Which of the following would be considered employed: C (A teacher on summer vacation until school begins in the fall)