ANSWERS FOR TUTORIAL 9: Gross Domestic Product

GT11103 Economics
Semester 2, 2023/2024
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Structure and calculation questions:

1.

Figure 4.1 shows the flows of expenditure and income for a small nation. During
2014, flow A was –$15 million, flow B was $40 million, flow C was $90 million, and
flow D was $45 million. Calculate

a. Aggregate expenditure = C+I+G+(X-M)

= $90m + $45m + $40m + (-$15m)
= $160 million.

b. Aggregate income = aggregate expenditure = $160 million.

c. GDP = aggregate expenditure = aggregate income = $160 million.

2. To estimate GDP you add the value of all the goods and services produced, both
final and intermediate goods. Is this procedure correct? Why?
A: Adding all the goods and services produced is incorrect because it will lead to
significant double counting. Intermediate goods and services will be double counted.
For instance, if a CPU produced by Intel and then used in a Dell computer is counted
both as a CPU from Intel and as part of the computer from Dell, the CPU has been
double counted.

3. Does my purchase of a domestically produced Ford automobile that was

manufactured in 2010 add to the current U.S. GDP? Why? How about my purchase
of a domestically produced, newly produced Ford? Why?
A: The purchase of the used Ford does not add to the current U.S. GDP though it
did add to U.S. GDP in 2010 when the car was newly produced. GDP measures
production within a given time period and the used Ford was not produced within
the current year. A new Ford automobile, however, is counted in current U.S. GDP
because it was produced in the current year.

4. In the United States, many children receive day-care from commercial providers. In
Africa, this is unknown; children are almost all cared for by relatives. How would this
difference affect comparisons of GDP per person?
A: This difference means that U.S. GDP per person is biased higher than GDP per
person in African countries. In both the United States and in Africa children are
cared for so the same service is produced in both regions. But in the United States
this service is included in GDP because it is purchased in a market; however, in
Africa the service is not included in GDP because it is performed as household
production.

Multiple-choice questions:

1. If New Balance (shoes brand), an American corporation, produces shoes in China,

this would
A. count as part of U.S. GDP since it is a U.S. corporation.
B. count for both China’s GDP and U.S. GDP.
C. add to China's GDP but not to U.S. GDP.
D. add to neither U.S. GDP nor China's GDP.
Answer: C

2. The calculation of the final goods and services sold in an economy would NOT
include
A. the purchase of a lawnmower by a household.
B. General Motors' purchases of tires for new automobiles.
C. Ford Motor Company's purchase of a new industrial robot to be used to produce
cars.
D. the purchase of a service by a household.
Answer: A

3. In an economy, the value of inventories was $55 billion in year 1 and $70 billion in
year 2. In calculating total investment for year 2, national income accountants would
A. increase it by $15 billion.
B. increase it by $70 billion.
C. decrease it by $55 billion.
D. decrease it by $125 billion.
Answer: A

4. GDP using the expenditure approach equals the sum of personal consumption
expenditures plus
A. gross private investment.
B. gross private investment plus government expenditure on goods and services.
C. gross private investment plus government expenditure on goods and services minus
imports of goods and services.
D. gross private investment plus government expenditure on goods and services plus
net exports of goods and services.
Answer: D

5. A business buys $10,000 worth of inputs from other firms in order to produce a
product. The business makes 500 units of the product and each of them sells for
$50. The value added by the business to these products is
A. $500.
B. $15,000.
C. $50.
D. $25,000.
Answer: B