Economics (McConnell), AP Edition, 20th Edition Chapter 25

Chapter 25: Measuring Domestic Output and National Income Multiple-Choice Questions 1. All of the following products would be included in the calculation of the U.S. GDP EXCEPT (A) German cars produced in Kentucky (B) haircuts done by Italian-owned firms in the United States (C) printers produced by American-owned companies manufactured and sold in Canada (D) an American firm's purchase of capital equipment produced in Arizona (E) United States government spending on construction of interstate highways (C) Products produced and sold in other countries are counted in that nation's GDP, not ours, even if it is an American company producing the product. Therefore, printers produced and sold in Canada do not count in the GDP of the United States, but are included in the GDP of Canada. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Macroeconomics: Components of Gross Domestic Product Book Section: Gross Domestic Product 2. Which of the following would be included in the calculation of U.S. GDP? (A) A girl mowing her family's yard (B) A student buying a used car (C) A neighbor paying a babysitter with homemade cookies (D) A senior citizen receiving a Social Security check (E) A family buying dinner at a restaurant (E) Answers (A) and (C) are examples of home production, (B) is the purchase of a used good, and (D) is a purely financial transaction, none of which are counted in GDP. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Macroeconomics: Components of Gross Domestic Product Book Section: GDP Excludes Nonproduction Transactions 3. Why are intermediate goods not included in the calculation of GDP? (A) Consumers cannot use intermediate goods. (B) They are not subject to sales taxes. (C) They are imported. (D) They would be double-counted when the finished product is counted. (E) They are only a single stage in multiple steps of production. (D) Intermediate goods are sold to other firms to be included in the final product of the other firm. Counting it once when sold to the other firm, and then counting it again in the final product, double-counts the product. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Macroeconomics: Components of Gross Domestic Product Book Section: Avoiding Multiple Counting 4. Why are transfer payments not included in the calculation of GDP? (A) Recipients have not produced any output in return for the payment. (B) The payments generally are made to those with the lowest incomes. (C) Government spending is not included in the calculation of GDP. (D) Transfer payments are intended to promote economic activity. (E) Transfer payments have no impact on the economy. (A) Transfer payments are made to recipients who do not contribute to the current year’s production. For that reason, transfer payments are not included in the calculation of the current year’s GDP. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Macroeconomics: Components of Gross Domestic Product Book Section: Government Purchases 5. The largest sector in the expenditure model of GDP is the (A) consumer sector (B) investment sector (C) government sector (D) import sector (E) export sector (A) Consumers account for more than two-thirds of spending in the U.S. economy. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Macroeconomics: Components of Gross Domestic Product Book Section: The Expenditures Approach 6. The calculation of gross private domestic investment includes I. firms' spending for equipment and machinery II. all construction III. depreciation IV. changes in inventories (A) I only (B) II and III only (C) III and IV only (D) I, II, and IV only (E) I, III, III, and IV (D) Depreciation is subtracted from gross private domestic investment to calculate net private domestic investment. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Macroeconomics: Components of Gross Domestic Product Book Section: Gross Private Domestic Investment 7. Net exports as a factor in U.S. GDP have been negative since the 1980s because (A) the federal government has experienced consistent budget deficits (B) the value of imports has exceeded the value of exports (C) the real GDP has been declining throughout this period (D) inflation has reduced the value of the dollar (E) trade barriers have effectively limited the number of imports (B) Net exports (Xn) is the value of exports (X) minus the value of imports (M). Because U.S. imports have been greater than U.S. exports since the 1980s, the net exports (Xn) component of the GDP calculation will be negative. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Macroeconomics: Components of Gross Domestic Product Book Section: Net Exports 8. Why must GDP calculated using the expenditure approach equal GDP calculated using the income approach? (A) Income and spending are both reported to government agencies. (B) Spending in the economy must equal the incomes earned in the economy. (C) Taxes must be paid on both income and sales. (D) Both approaches use product sales as their base. (E) Economists add a statistical correction to the expenditure approach C + Ig + G + X (X as the correction) to ensure that it equals the income approach. (B) Money spent by one market participant is income to another. So if the numbers are accurately compiled (there has not been double counting), GDP will be the same using either method of calculation. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Macroeconomics: Gross Domestic Product Book Section: Two Ways of Looking at GDP: Spending and Income 9. The measure of consumer income after payment of personal taxes is (A) national income (B) personal income (C) disposable income (D) gross domestic product (E) net domestic product (C) Disposable income is all household income after personal taxes have been paid. National income is the total income of all resource suppliers plus taxes. Personal income is household income before personal taxes are paid. Gross domestic product is the total economic output. Net domestic product is GDP minus depreciation. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Macroeconomics: National Income Accounts Book Section: Disposable Income 10. Real GDP, rather than nominal GDP, is used to compare changes in national output over time, because real GDP removes the effects of (A) imports (B) unemployment (C) taxes (D) interest (E) inflation (E) Because nominal GDP is calculated using the current value of money, nominal GDP would increase when prices rise, even if the same quantity of products is produced. Real GDP removes that distortion. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Macroeconomics: Real versus Nominal Gross Domestic Product Book Section: Nominal GDP versus Real GDP 11. If real GDP increased 2% this year and the price level increased 4% this year, how much did nominal GDP increase this year? (A) –2 % (B) 2 % (C) 4 % (D) 6 % (E) 8 % (D) % Change in Nominal GDP = % Change in Real GDP + % Change in Prices (2% – 4% = – 2%) Difficulty: Medium Style: Application AP Economics Curricular Requirement Macroeconomics: Real versus Nominal Gross Domestic Product Book Section: Nominal GDP versus Real GDP 12. The shortcomings of gross domestic product as a measure of all economic activity in a country include all of the following EXCEPT that it (A) does not include home production such as repairing one's own car (B) cannot measure improvements in the quality of products (C) does not take into consideration negative externalities such as pollution (D) does not take into account increased leisure time or quality of life (E) does not count government spending for public goods (E) Government spending for public goods is a part of the expenditure formula for GDP: C + Ig + G + X (G is the government sector). Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Gross Domestic Product Book Section: Shortcomings of GDP Stage of Production Sales Value of Materials or Product at the End of Each Stage ($) Value Added at Each Stage ($) 0 Ranch (Sheep) 120 120 Wool (Processor) 180 60 Textile Producer (Wool Coat) 220 40 Wool Coat Wholesaler 270 50 Wool Coat Retailer 350 80 Total Value of All Stages $1,140 Total Income (Price of the Coat) $350 13. Based on the table above, the amount included in the calculation of the current year’s GDP would be (A) $1,140 (B) $ 790 (C) $ 350 (D) $ 230 (E) $ 120 (C) The production and sale of the coat created $350. The final retail price of the coat is $350. Alternatively, the value added is also $350. Difficulty: Hard Style: Application AP Economics Curricular Requirement Macroeconomics: Gross Domestic Product Book Section: Avoiding Multiple Counting 14. Gross private domestic investment for the current year includes I. all stocks and bonds purchased in the current year II. all final purchases of machinery, equipment, and tools used to produce final goods and services III. all changes in business inventories IV. all purchases of personal and business real estate V. all construction (A) I and II only (B) I, II, and IV only (C) II and III only (D) II, III, and IV only (E) II, III, and V only (E) Gross private domestic investment includes all final purchases of machinery, equipment, and tools used to produce final goods and services, all construction, and all changes in inventories. Difficulty: Hard Style: Factual AP Economics Curricular Requirement Macroeconomics: National Income Accounts Book Section: Gross Private Domestic Investment Personal consumption $10,089 Gross private domestic investment 1,628 Government purchases 2,931 Net exports -392 Total $14,256 Source: Bureau of Economic Analysis: www.bea.gov 15. Given the 2009 figures for the US economy (in billions of dollars) in the table above, the “Total” measures (A) net national income for the year 2009 using the income approach (B) net national income for the year 2009 using the expenditure approach (C) gross domestic product for the year 2009 using the income approach (D) gross domestic product for the year 2009 using the expenditure approach (E) national income for the year 2009 using the expenditure approach (D) The table above gives the data for the gross expenditure components (C, Ig, G, Xn) that, when totaled, give the gross domestic product for the United States in the year 2009. Difficulty: Medium Style: Application AP Economics Curricular Requirement Macroeconomics: Gross Domestic Product Book Section: The Expenditures Approach Compensation of employees $7,792 Rents 268 Interest 788 Proprietors’ income 1,041 Corporate profits 1,309 Taxes on production and imports 1,090 National Income 12,288 Net foreign factor income -105 Statistical discrepancy 209 Consumption of fixed capital 1,864 Gross Domestic Product $14,256 Source: Bureau of Economic Analysis: www.bea.gov 16. Given the 2009 figures for the US economy (in billions of dollars) in the table above, the $1,864 billion consumption of fixed capital represents (A) newly purchased privately-owned capital equipment by American businesses (B) newly purchased privately-owned capital equipment by all firms operating within the United States (C) newly purchased publicly-owned capital equipment within the United States (D) depreciation of privately-owned capital equipment by American businesses (E) depreciation of privately- and publicly-owned capital equipment within the United States (E) The consumption of fixed capital (the capital depreciation allowance) of $1,864 billion in 2009 includes all privately- and publicly-owned capital equipment within the United States. This figure represents the wear and tear on the private and public physical capital that was used to produce the current year’s goods and services (GDP). Difficulty: Medium Style: Application AP Economics Curricular Requirement Macroeconomics: Gross Domestic Product Book Section: Gross Private Domestic Investment 17. The largest sector of the income approach model of GDP is (A) taxes (B) corporate profits and proprietors’ income (C) interest (D) rents (E) wages (E) Wages constitute more than half of the U.S. gross domestic product. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Macroeconomics: Components of Gross Domestic Product Book Section: Compensation of Employees 18. The majority of spending in the consumer sector is spent for (A) Durable goods, such as furniture (B) Nondurable goods, such as food (C) Construction, such as new homes (D) Services, such as haircuts (E) Used goods, such as used cars (D) Service purchases comprise approximately 60% of personal consumption expenditures. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Macroeconomics: Components of Gross Domestic Product Book Section: Personal Consumption Expenditures 19. To calculate disposable income, which of the following adjustments are made to personal income? (A) Private transfer payments are added and both household taxes and household savings are subtracted. (B) Private transfer payments, household taxes, and savings are subtracted. (C) Household taxes are subtracted and private transfer payments and household savings are added. (D) All personal taxes are subtracted and Social Security payments are added. (E) All personal taxes are subtracted. (E) Disposable income is equal to personal income minus all personal taxes. Difficulty: Hard Style: Factual AP Economics Curricular Requirement Macroeconomics: National Income Accounts Book Section: Disposable Income Year Units of Output Price of Cotton Per Bushel ($) Price Index (Year 1 = 100) Nominal GDP ($) 1 5 10 100 50 2 7 20 200 140 3 8 25 250 200 20. Given the data in the table above, the real GDP for this one-product economy in year 3 is (A) $50 (B) $70 (C) $80 (D) $200 (E) $250 (C) This calculation requires two steps. The market basket for this nation is based on a single product (cotton measured in bushels). First, the price index in the given year (year 3) must be calculated by dividing the price of the market basket in the specific year (year 3) by the price of the same market basket in the base year (year 1) and multiplying that by 100. In this case, the price index in year 3 is equal to 250/100 multiplied by 100 for a value of 250. Second, to calculate real GDP, nominal GDP for year 3 ($200) is divided by the price index (in hundredths) to determine that the real GDP in year 3 is $80 in year 1 dollars (200 / 2.5 = 80). Difficulty: Hard Style: Application AP Economics Curricular Requirement Macroeconomics: Real versus Nominal Gross Domestic Product Book Section: Adjustment Process in a One-Product Economy 21. The gross national product, calculated from the income approach, includes all of the following EXCEPT (A) wages (B) rents (C) investments (D) profits (E) taxes (C) Investment, the business purchases of plant and equipment, is included in the expenditure approach to GDP, not the income approach. Personal investments, such as stocks and bonds, are not included in GDP calculations. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Macroeconomics: Components of Gross Domestic Product Book Section: The Income Approach 22. Which of the following forms of income is NOT correctly paired with its recipient? (A) Workers earn wages. (B) Resource owners earn rents. (C) Suppliers of loans earn interest. (D) Local governments earn profit. (E) Governments earn taxes. (D) Sole proprietors, partners, and corporations earn profits. Local governments earn taxes. Difficult: Easy Style: Factual AP Economics Curricular Requirement Macroeconomics: Components of Gross Domestic Product Book Section: The Income Approach 23. The gross domestic product, adjusted for depreciation, is (A) net domestic product (B) national income (C) personal income (D) disposable income (E) real gross domestic product (A) The net domestic product subtracts the depreciation of capital equipment from GDP, to calculate how much of annual production can be consumed without hurting the economy’s ability to produce in the future. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Macroeconomics: National Income Accounts Book Section: Net Domestic Product 24. The GDP price deflator (index) is calculated by dividing (A) the real GDP by the nominal GDP (B) this year’s market basket price by the base year’s market basket price (C) national income by the inflation rate (D) income-approach GDP by expenditure-approach GDP (E) private sector expenditures by public sector expenditures (B) The nominal GDP can then be divided by the GDP price deflator to convert nominal GDP to real GDP. Difficulty: Easy Style: Factual AP Economics Curricular Requirement Macroeconomics: Real versus Nominal Gross Domestic Product Book Section: Adjustment Process in the One-Product Economy 25. Because the underground economy and nonmarket transactions are not included in the official calculation of a nation’s GDP, the official GDP (A) overestimates actual production in the economy (B) should not be used as an indicator of production in the economy (C) underestimates actual production in the economy (D) accurately records the well-being of a nation’s residents (E) overestimates incomes in the economy (C) Economic activity is occurring in underground and nonmarket sectors, but because it is not counted in the official GDP statistics, official GDP underestimates the true level of economic activity in a country. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Gross Domestic Product Book Section: Shortcomings of GDP Free-Response Question This Year’s Output This Year’s Prices 1,000 pounds of hamburger produced and sold locally $2 per pound 2 used cars purchased $10,000 per car 10 clothing items imported and sold locally $20 per item of clothing 10,000 pounds of bananas produced, 2000 pounds of which are exported $1 per pound Government salaries for civil servants $5,000 1 banana-packing machine, produced and sold locally $250 Unreported income paid for domestic household help $1,000 An independent tropical island nation produces a limited amount of products each year. The table below shows this year's prices and purchases of products on the island. (a) Using the data in the table above, calculate this year's nominal GDP for this island nation. (b) If the price index is 110, calculate this year's real GDP for this island nation. (c) Identify each factor in the table that would not be included in GDP using the expenditure model. For each factor, complete the following. (i) Identify the factor that would not be included in GDP (ii) Explain why that factor would not be included in the GDP calculation (d) Explain one shortcoming of using GDP as an accurate measure of the standard of living for residents of a country. Free-Response Explanation 7 points (1 + 1 + 4 + 1) (a) 1 point: 1 point is earned for stating that this year's nominal GDP for this island nation is $17,050: (1,000 x $2) - (10 x $20) + (10,000 x $1) + $5,000 + $250 = $17,050. (b) 1 point: 1 point is earned for stating that this year's real GDP for this island nation is $15,500: ($17,050/1.10) = $15,500. (c) 4 points: 1 point is earned for stating that the used cars are not counted in GDP. 1 point is earned for explaining that GDP only measures new output for the year, not used goods. 1 point is earned for stating that unreported income paid for domestic household help is not counted in GDP. 1 point is earned for stating that illegal activity is not counted because reliable numbers are difficult to calculate. (d) 1 point: 1 point is earned for identifying one shortcoming of GDP. Acceptable answers include: Population (needing to use per capita GDP) Nonmarket activities Bartered goods and services Leisure Quality of life Negative externalities The mix of consumer and government goods Distribution of incomes Difficulty: Hard Style: Application AP Economics Curricular Requirement Macroeconomics: Measurement of Economic Performance Book Section: Measuring Domestic Output and National Income