Chapter 5 - MEASURING A NATION’S INCOME

Question 1

What two thing does GDP measure at once?

Answer 1

The total income of everyone in the economy and the total expenditure on the economy’s output of goods and services.

Question 2

Why must income be equal to expenditure for an economy as whole?

Answer 2

Because every transaction has two parties: a buyer and a seller. Every dollar of spending by some buyer is a dollar of income for some seller.

Question 3

How is GDP defined?

Answer 3

The market value of all final goods and services produced within a country in a given period of time.

Question 4

What is the components of GDP?

Answer 4

GDP = Y
Consumption = C
Investment = I
Government purchases = G
Net exports = NX

Y = C + I + G + NX

Question 5

What does the consumption stand for in GDP?

Answer 5

Spending by households on goods and services, with the exception of purchases of new housing.

Question 6

What does the investments stand for in GDP?

Answer 6

Purchases of goods (such as business capital, residential structures, and inventories) that will be used to produce other goods and services in the future.

Question 7

What does the government purchases stand for in GDP?

Answer 7

Spending on goods and services by local, state, and federal governments. It includes the salaries of government workers as well as expenditures on public works.

Question 8

What does net exports stand for in GDP?

Answer 8

Net exports equal the foreign purchases of domestically produced goods (exports) minus the domestic purchases of foreign goods (imports).

Question 9

What is real GDP? What does the change in real GDP reflect?

Answer 9

The production of goods and services valued at constant prices.

Changes in real GDP reflect only the change in the amounts being produced.

Question 10

What must be true if total spending rises from one year to the next year?

Answer 10

1) The economy is producing a larger output of goods and services.

or

2) Goods and services are being sold at higher prices.

Question 11

What is nominal GDP?

Answer 11

The production of goods and services, valued at current prices.

Question 12

What is the reason to compute GDP? And why is real GDP better than nominal GDP?

Answer 12

-gauge how well the economy is performing

-real GDP measures the economy’s production of goods and services

-reflects the economy’s ability to satisfy people’s needs and desires

Question 13

What is the formula for GDP deflator?

Answer 13

GDP deflator = Nominal GDP/Real GDP

Question 14

What is the formula for inflation rate?

Answer 14

(GDP deflator (t) - GDP deflator (t-1))/GDP deflator(t-1)

Question 15

Determine how much GDP and each of its components is affected (if at all):

Debbie spends $200 to buy her husband dinner at the finest restaurant in Toronto

Answer 15

Consumption and GDP rise by $200.

Question 16

Determine how much GDP and each of its components is affected (if at all):

Sarah spends $1800 on a new laptop to use in her publishing business. The laptop was built in China.

Answer 16

Investment rises by $1800, net exports fall by $1800, GDP is unchanged.

Question 17

Determine how much GDP and each of its components is affected (if at all):

Jane spends $1200 on a computer to use in her editing business. She got last year’s model on sale for a great price from a local manufacturer.

Answer 17

Current GDP and investment do not change because the computer was built last year.

Question 18

Determine how much GDP and each of its components is affected (if at all):

General Motors builds $500 million worth of cars, but consumers only buy $470 million worth of them.

Answer 18

Consumption rises by $470 million, inventory investment rises by$30 million, and GDP rises by $500 million.

Question 19

If the price of a hot dog is $2 and the price of a hamburger is $4, then 30 hot dogs contribute as much to GDP as what number of hamburgers?

Answer 19

15

Question 20

Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each of which has a market price of $40. Collette buys one of them, while the other remains on the shelf of Barnaby’s store to be sold later. What is GDP here?

Answer 20

$80

Question 21

What is the largest component of GDP?

Answer 21

Consumption

Question 22

Suppose a cobbler buys leather for $150 and thread for $50 and uses them to produce and sell $350 worth of shoes to consumers. Which one of the following is the contribution to GDP?

Answer 22

$350

Question 23

A Canadian buys a pair of shoes manufactured in Italy. How is the transaction treated in Canada’s national income accounts?

Answer 23

Net exports fall, while GDP is unchanged.

Question 24

When a person buys a house, it affects which of the following component of GDP?

Answer 24

investment

Question 25

What components of GDP (if any) would each of the following transactions affect?

A family buys a new refrigerator

Answer 25

GDP increases and C increase

Question 26

What components of GDP (if any) would each of the following transactions affect?

Aunt Jane buys a new house

Answer 26

GDP increase and I increase

Question 27

What components of GDP (if any) would each of the following transactions affect?

Ford sells a Thunderbird from its inventory

Answer 27

C increases and I decrease

Question 28

What components of GDP (if any) would each of the following transactions affect?

You buy a pizza

Answer 28

GDP increase and C increase