Inflation and GDP: Practice Questions

GDP

Expenditure Approach:

GDP =

1. Which of the following transactions are included in the GDP, and to which
component of expenditure GDP does each belong?

Transaction Included/Not Component/Explanation

Included

The purchase of building materials by a

contractor who is working on your
kitchen

The sale of a dozen ears of corn in the

supermarket

Betty receives a Welfare check for

$1,800 from the government.

The sale of a basket of tomatoes at a

road-side stand

A 1962 Camaro sold to a collector in

February of this year.

A Samsung produced in South Korea.

Tax services provided by H&R Block to

a customer in April of this year.

Robert buys 500 shares of stock in

Microsoft and pays a total of $10,000

Government Buys a new fleet of

military ships
 Inflation and GDP: Practice Questions

2. Consider the following tables showing the breakdown of GDP (in billions) for Canada.

a.
Consumption 1,800
Investment 600
Government Expenditure 200
Exports 30
Imports 30

i. Calculate Canada’s GDP

ii. Examine exports and imports. What is Canada experiencing?

b.

Consumption 1,600
Investment 900
Government Expenditure 300
Exports 50
Imports 10

iii. Calculate Canada’s GDP

iv. Examine exports and imports. What is Canada experiencing?

c.
Personal Consumption 3,657

Depreciation 400

Wages 3,254

Indirect Business Taxes 500

Interest 530

Domestic Investment 741

Government Expenditures 1,098

Rental Income 17

Exports 673

Net Foreign Factor Income 20

Imports 704
 Inflation and GDP: Practice Questions

i. Calculate Canada’s GDP

ii. Examine exports and imports. What is Canada experiencing?

Inflation

1. Suppose that the market basket to calculate the consumer price index (CPI) contains 30
cans of tuna, 6 onions and 1 bag of sugar. You are given the following price data for
three years.

Good Amount Year 1 Total Year 2 Total Year 3 Total

Price Spent Price Spent Price Spent
Tuna 30 $2.50 $75 $2.70 $81 $2.95 $88.50

Onions 6 $0.70 $4.20 $0.80 $4.80 $0.92 $5.52

Sugar 1 $12 $12 $14.50 $14.50 $16.70 $16.70

TOTAL $91.20 $100.30 $110.72

a. What is the price index (CPI) in Year 2 if the base year is Year 1?

b. What is the rate of inflation?

 Inflation and GDP: Practice Questions

c. What is the price index (CPI) in Year 3 if the base year is Year 2?

d. What is the rate of inflation?

2. Suppose that the market basket to calculate the CPI in Toronto. You are given the
following price data for the years 2010 through 2015 in Toronto.

a. Using the data above calculate the cost of each market basket. Put your answers in the
following table.
Year Cost of Basket

2010

2011

2012

2013

2014

2015

b. Calculate the CPI for 2010 through 2015 using 2010 as the base year. Enter your results
in the following table.
Year CPI

2010

2011

2012
 Inflation and GDP: Practice Questions

2013

2014

2015

c. Using the answers you got in part (b) calculate the annual rate of inflation in this
economy from 2011 through 2015.

Year Inflation Rate

2011

2012

2013

2014

2015