Practice Quizzes - Measuring a Nation’s Income

Topic 2: MEASURING A NATION’S INCOME

I. TERMS AND DEFINITIONS: Choose a definition for each key term

g. Expenditures by government for which they receive no goods
1. Total income of services
2. Gross Domestic Product k. Goods that are produced by one firm to be further processed
by another firm
3. Intermediate production l. The production of goods and services valued at base year
prices
4. Final production
m. Finished products sold to the end user
5. Gross National Product n. The year from which prices are used to measure real GDP
o. Value of worn out equipment and structures
6. Depreciation
1-e 1e/
7. Consumption 2-d 2d/
3-k 3k/
8. Investment 4-m 4m/
9. Government purchases 5-f 5f/
6-0 6o/
10. Net exports 7-b 7b/
8-g 8g/
11. Transfer payment
9-h 9h/
12. Real GDP 10-c 10c/
11-g 11g/
13. Nominal GDP 12-l 12l/
13-a 13a/
14. Base year
14-n 14n/
15. GDP deflator 15-i 15i
Key

a. The production of goods and services valued at current year prices

b. Spending by households on goods and services, excluding new housing
c. Spending on domestically produced goods by foreigners (export) minus spending on foreign goods by
domestic residents (import)
d. Market value of all final goods and services produced within a country in a given period of time
e. Wages, rent, interest, and profit
f. Market value of all final goods and services produced by a nation’s residents in a given period of time
g. Spending on capital equipment, inventories, and structures, including household purchases of new
housing
h. Spending on goods and services by all level of government
i. A measure of the price level calculated as the ratio of nominal GDP to real GDP, then multiplied by
100

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 Practice Quizzes - Measuring a Nation’s Income

g. Expenditures by government for which they receive no goods of services

k. Goods that are produced by one firm to be further processed by another firm
l. The production of goods and services valued at base year prices
m. Finished products sold to the end user
Key: 1F/ 2T/
n. The year from which prices are used to measure real GDP 3F/ 4T/ 5F/
6F/ 7F/ 8F/
9F
o. Value of worn out equipment and structures

II. TRUE OR FALSE? EXPLAIN YOUR CHOICE BRIEFLY

1. An increase in nominal GDP of Vietnam necessarily implies that the Vietnam is producing a larger
output of goods and services. F-An increase in nominal GDP may just mean prices have increased,
while an increase in real GDP definitely means output increased.
2. If nominal GDP is 10,000 and real GDP is 8,000 the GDP deflator is 125.
3. New home construction is included in the consumption component ofConsumption
GDP. (C) includes spending by households on final goods and services, not
investment in new structures. New home construction falls under the Investment (I)
component of GDP.

4. The government component of GDP includes salaries paid to Army generals but not Social Security
benefits to the elderly. T - Bcz GDP is the mảket value of final G&S produced, while the Social security is
transfer payment from Gov to residents, just the flow of money, not G&S
5. GDP is perfect measure of output of each economy.
F- GDP is a useful metric, but it has limitations. It doesn't account for
factors like environmental impact, leisure time, or income distribution.
6. If nominal GDP in 2000 exceeds nominal GDP in 1999, real output must have risen.
F- An increase in nominal GDP may just mean prices have increased
7. If the lumber man sells $1000 of lumber to a carpenter and the carpenter uses the lumber to build a
garage which he sells for $5000, the contribution
Text to GDP is $6000. F -$1000

8. A new car produced in 1999, but first sold in 2000, should be counted in 2000 GDP because that is
when it was first sold as a final good. F- GDP measures final good sales

9. Between 1929 and 1933 GDP measured in current prices fell from $96 billion to $48 billion. We can
conclude that the quantity ofF-goods and services produced by the economy declines 100%.
The decline from $96 billion to $48 billion likely reflects a combination of falling output
(Great Depression) and deflation (decreasing prices). This period saw both production
III. PROBLEM SOLVING decline and price levels drop. We can't conclude a 100% decline in production without further
analysis (e.g., real GDP data).
One day, Barry the Barber, Inc., collects $400 for haircuts. Over this day, his equipment depreciates
in value by $50. Of the remaining $350, Barry sends $30 to the government in sales taxes, takes home
$220 in wages, and retains $100 in his business to add new equipment in the future. From the $220
that Barry takes home, he pays $70 in income taxes. Based on this information, compute Barry’s
contribution to the following measures of income.
1. gross domestic product
2. net national product
3. national income
4. personal income

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 Practice Quizzes - Measuring a Nation’s Income

5. disposable personal income

IV. MULTIPLE-CHOICE QUESTIONS

1. An example of a transfer payment is
a. wages.
b. profit.
c. rent.
d. government purchases.
e. unemployment benefits.
2. The value of plant and equipment worn out in the process of manufacturing goods and services
is measured by
a. consumption.
b. depreciation.
c. Net National Product.
d. investment.
e. intermediate production.
3. Which of the following would be excluded from 1989 GDP? The sale of
a. a 1989 Honda made by HondaVN.
b. a haircut.
c. a realtor’s services.
d. a home build in 1988 and first sold in 1989.
e. all of the above should be counted in 1989 GDP.
4. Gross Domestic Product can be measured as the sum of
a. consumption, investment, government purchases, and net exports.
b. consumption, transfer payments, wages, and profits.
c. investment, wages, profits, and intermediate production.
d. Net National Product, Gross National Product, and Disposable personal income.
5. VN’s Gross Domestic Product measures the production and income of
a. Vietnamese and their factories no matter where they are located in the world.
b. people and factories located within the borders of VN.
c. the domestic service sector only.
d. the domestic manufacturing sector only. Key: 1e/ 2b/ 3d/ 4a/ 5b/ 6e/ 7d/
8b/ 9d/ 10a/ 11b/ 12a/ 13c/ 14b/
e. none of the above.
15b/ 16c/ 17c/ 18b/ 19c/ 20a

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 Practice Quizzes - Measuring a Nation’s Income

6. Gross Domestic Product is the sum of the market value of the

a. intermediate goods.
b. manufactured goods.
c. normal goods and services.
d. inferior goods and services.
e. final goods and services.
7. Nominal GDP in 2000 exceeds nominal GDP in 1999, then the production of output must have
a. risen.
b. fallen.
c. stayed the same.
d. risen or fallen because there is not enough information to determine what happen to real output.
8. If a cobbler buys leather for $100 and thread for $50 and uses them to produce and sell $500
worth to shoes to consumers, the contribution of the cobbler to GDP is
a. $150.
The cobbler buys leather for $100 and thread for $50, totaling $150 in intermediate goods costs.
b. $350. The cobbler then uses these materials to produce shoes sold to consumers for $500.
c. $500. => 500-(100+50)

d. $600.
e. $650.
9. GDP would include which of the following?
a. housework
b. illegal drug sales
c. intermediate sales
d. consulting services
e. the value of taking a day off from work.
10. If GDP exceeds GNP, then
a. foreigners are producing more in VN than Vietnamese are producing in foreign countries.
b. Vietnamese are producing more in foreign countries than foreigners are producing in VN.
c. real GDP exceeds nominal GDP.
d. real GNP exceeds nominal GNP.
e. intermediate production exceeds final production.

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 Practice Quizzes - Measuring a Nation’s Income

11. How is your purchase of a $40000 BMW automobile that was entirely produced in Germany
recorded in the VN’s GDP accounts?
a. investment increases by $40000 and the net export increases by $40000.
b. consumption increases by $40000 and net exports decreases by $40000.
c. net exports decreases by $40000.
d. there is no impact because this transaction does not involve domestic production.
12. GDP is used as the basic measure of a society's economic well-being. A better measure of the
economic well-being of individuals in society is
a. GDP per person.
b. the consumption component of GDP.
c. government expenditures per person.
d. the level of business investment.
13. If a country reported nominal GDP of 200 billion in 2002 and 180 billion in 2001 and reported a GDP
deflator of 125 in 2002 and of 105 in 2001, then from 2001 to 2002 real output
a. and prices both rose.
b. rose and prices fell.
c. fell and prices rose.
d. and prices both fell.
14.Which of the following statements about nominal GDP and real GDP is most accurate?
a. Nominal GDP is a better gauge of economic well-being than is real GDP.
b. Real GDP is a better gauge of economic well-being than is nominal GDP.
c. Real GDP and nominal GDP are equally good measures of economic well-being.
d. Whether real GDP or nominal GDP is a better measure of economic well-being depends on what
sort of goods are produced.
15. Transfer payments are
a. included in GDP because they represent income to individuals.
b. not included in GDP because they are not payments for currently produced goods or services.
c. included in GDP because the income will be spent for consumption.
d. not included in GDP because taxes will have to be raised to pay for them.
16. After the terrorist attack on September 11, governments raised expenditures to increase
security at airports. These purchases of goods and services are
a. not included in GDP since they are not productive.
b. not included in GDP since the government will have to raise taxes to pay for them.
c. included in GDP since government expenditures are included in GDP.

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 Practice Quizzes - Measuring a Nation’s Income

d. included in GDP only to the extent that the Federal, and not state or local governments, paid for
them.
17. A German citizen buys an automobile produced in the United States by a Japanese company.
As a result,
a. U.S. net exports increase, U.S. GNP and GDP are unaffected, Japanese GNP increases, German net
exports decrease, and German GNP and GDP are unaffected.
b. U.S. net exports, GNP, and GDP increase, Japanese GDP increases, German net exports decrease,
and German GDP is unaffected.
c. U.S. net exports and GDP increase, Japanese GNP increases, German net exports decrease, and
German GDP and GNP are unaffected.
d. U.S. net exports, GNP, and GDP are unaffected, Japanese GNP increases, German net exports
decrease, and German GDP and GNP fall.
18. When a firm produces consumer goods and adds some to inventory rather than selling it. It is
a. not counted in the current quarter GDP.
b. counted in the current quarter GDP as investment.
c. counted in the current quarter GDP as consumption.
d. counted in the current quarter GDP as a statistical discrepancy.
19. In computing GDP, investment is spending on
a. stocks, bonds, and other financial assets.
b. real estate and financial assets.
c. new capital equipment, inventories, and structures, including new housing.
d. capital equipment, inventories, and structures, excluding household purchases of new housing.
20. A professional gambler moves from a state where gambling is illegal to a state where gambling
is legal. This move
a. necessarily raises GDP.
b. necessarily decreases GDP.
c. doesn’t change GDP because gambling is never included in GDP.
d. doesn’t change GDP because in either case his income is included.

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