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180. Real GDP in the United States is five times as great as it was 50 years ago, yet GDP weighs almost the same as it did
a half century ago and the population has less than doubled. These facts suggest that a. consumers are having to settle for lower quality goods. b. we are no longer in danger of running out of raw materials.
c. each U.S. worker is more productive, and international trade is less expensive to conduct. d. Americans are actually consuming fewer goods per person than they did 50 years ago. ANS: C PTS: 1 DIF: 2 REF: 23-5 TOP: Real GDP | Population growth MSC: Interpretive 181. GDP is not a perfect measure of well-being; for example,
a. GDP incorporates a large number of non-market goods and services that are of little value to society. b. GDP places too much emphasis on the value of leisure. c. GDP fails to account for the quality of the environment. d. All of the above are correct. ANS: C PTS: 1 DIF: 1 REF: 23-5 TOP: Real GDP | Economic welfare MSC: Interpretive 182. GDP is not a perfect measure of well-being; for example,
a. GDP excludes the value of volunteer work.
b. GDP does not address the distribution of income. c. GDP does not address environmental quality. d. All of the above are correct. ANS: D PTS: 1 DIF: 1 REF: 23-5 TOP: Real GDP | Economic welfare MSC: Interpretive 183. GDP does not reflect
a. the value of leisure.
b. the value of goods and services produced at home. c. the quality of the environment. d. All of the above are correct. ANS: D PTS: 1 DIF: 1 REF: 23-5 TOP: Gross domestic product MSC: Interpretive
184. International studies of the relationship between GDP per person and quality of life measures such as life expectancy
and literacy rates show that larger GDP per person is associated with
a. longer life expectancy and a lower percentage of the population that is literate. b. longer life expectancy and a higher percentage of the population that is literate.
c. very nearly the same life expectancy and a lower percentage of the population that is literate. d. very nearly the same life expectancy and a higher percentage of the population that is literate. ANS: B PTS: 1 DIF: 2 REF: 23-5 TOP: Gross domestic product MSC: Interpretive 185. Which of the following statements is accurate?
a. In rich countries, people typically live into their late seventies, while in poor countries, people typically live only
until their fifties or early sixties.
b. In rich countries, almost all citizens can read, while in poor countries, about half the population is illiterate. c. Poor countries tend to have higher infant mortality rates, higher maternal mortality, and higher rates of child
malnutrition than do rich countries. d. All of the above are correct. ANS: D PTS: 1 DIF: 1 REF: 23-5 TOP: Gross domestic product MSC: Interpretive 186. International data on GDP and socioeconomic variables
a. are inconclusive about the relationship between GDP and the economic well-being of citizens. b. suggest that poor nations actually might enjoy a higher standard of living than do rich nations. c. leave no doubt that a nation's GDP is closely associated with its citizens' standard of living.
d. indicate that there are few real differences in living standards around the world, in spite of the large differences in
GDP between nations.
ANS: C PTS: 1 DIF: 1 REF: 23-5 TOP: Gross domestic product | Standard of living MSC: Interpretive
Chapter 23/Measuring a Nation's Income ? 1009
187. Being able to measure the behavior of the economy with statistics such as GDP
a. is useful only in the accounting sense.
b. is all that is necessary in order for us to be able to understand macroeconomics.
c. can be helpful in developing macroeconomic science, but is not useful for policymaking. d. is a crucial step toward developing the science of macroeconomics. ANS: D PTS: 1 DIF: 1 REF: 23-5 TOP: Gross domestic product MSC: Interpretive
188. Countries in which the underground or “shadow” economy has been estimated to account for more than 50 percent of
GDP include
a. Georgia, Bolivia, and Zimbabwe. b. Thailand, Mexico, and Argentina. c. Japan, Bolivia, and Argentina.
d. Peru, Mexico, and the United States. ANS: A PTS: 1 DIF: 2 REF: 23-5 TOP: Underground economy MSC: Definitional 189. Which of the following serves as an example of the underground or “shadow” economy?
a. A woman barters home repairs with her neighbor.
b. A teenager babysits regularly and fails to report her income. c. A man sells illegal drugs and fails to report his income. d. All of the above are correct. ANS: D PTS: 1 DIF: 2 REF: 23-5 TOP: Underground economy MSC: Interpretive
True/False
1. Macroeconomic statistics include the inflation rate, the unemployment rate, GDP, and retail sales. ANS: T PTS: 1 DIF: 1 REF: 23-0 TOP: Inflation rate | Unemployment rate MSC: Definitional
2. The basic tools of supply and demand analysis are as central to macroeconomic analysis as they are to
microeconomic analysis. ANS: T PTS: 1 DIF: 1 REF: 23-0 TOP: Supply | Demand MSC: Interpretive 3. For an economy, in a given time period, income exceeds spending. ANS: F PTS: 1 DIF: 1 REF: 23-1 TOP: Income MSC: Interpretive
4. GDP may be calculated as either the production of, or the income generated by, the value of final goods and services
produced within an economy. ANS: T PTS: 1 DIF: 1 REF: 23-1 TOP: Gross domestic product MSC: Interpretive 5. U.S. GDP includes estimates of things such as unpaid housework and car maintenance. ANS: F PTS: 1 DIF: 1 REF: 23-2 TOP: Gross domestic product MSC: Definitional 6. U.S. GDP excludes the production of illegal goods. ANS: T PTS: 1 DIF: 1 REF: 23-2 TOP: Gross domestic product MSC: Definitional
7. When an American doctor opens a practice in Bermuda, his production there is part of U.S. GDP. ANS: F PTS: 1 DIF: 1 REF: 23-2 TOP: Gross domestic product MSC: Definitional
8. The government computes measures of income other than GDP, but they almost always all tell the same story about
the economy. ANS: T PTS: 1 DIF: 1 REF: 23-2 TOP: Gross domestic product MSC: Interpretive
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9. Expenditures by households on education services are included in the consumption component of GDP. ANS: T PTS: 1 DIF: 1 REF: 23-3 TOP: Consumption MSC: Definitional 10. New home construction is included in the consumption component of GDP. ANS: F PTS: 1 DIF: 2 REF: 23-3 TOP: Consumption | Investment MSC: Definitional
11. The government-purchases component of GDP includes salaries paid to Army generals but not Social Security
benefits to the elderly. ANS: T PTS: 1 DIF: 2 REF: 23-3 TOP: Government spending | Transfer payments MSC: Interpretive 12. If someone in the United States buys a surfboard produced in Australia, that purchase is included in both the
consumption component of U.S. GDP and the import component of U.S. GDP. ANS: T PTS: 1 DIF: 2 REF: 23-3 TOP: Consumption | Net exports MSC: Interpretive
13. Changes in inventory are included in the investment component of GDP. ANS: T PTS: 1 DIF: 1 REF: 23-3 TOP: Investment MSC: Definitional
14. An increase in nominal U.S. GDP necessarily implies that the United States is producing a larger output of goods and
services. ANS: F PTS: 1 DIF: 2 REF: 23-4 TOP: Nominal GDP MSC: Interpretive 15. If nominal GDP is $10,000 and real GDP is $8,000, then the GDP deflator is 125. ANS: T PTS: 1 DIF: 2 REF: 23-4 TOP: Nominal GDP | Real GDP | GDP deflator MSC: Interpretive 16. In 2004, the level of U.S. real GDP was close to four times its 1965 level. ANS: T PTS: 1 DIF: 2 REF: 23-4 TOP: Real GDP MSC: Definitional
17. If GDP is higher in one country than in another, we can be sure that the standard of living is higher in the country with
the higher GDP. ANS: F PTS: 1 DIF: 2 REF: 23-4 TOP: Real GDP | Standard of living MSC: Interpretive 18. GDP does not make adjustments for leisure time and environmental quality. ANS: T PTS: 1 DIF: 2 REF: 23-5 TOP: Gross domestic product MSC: Definitional
19. Even though GDP is not the only thing that affects the quality of life, it is a useful measure because it measures a
nation's ability to purchase the inputs that can be used to produce things such as good health and quality education. ANS: T PTS: 1 DIF: 2 REF: 23-5 TOP: Gross domestic product MSC: Interpretive
Short Answer
1. GDP is defined as the market value of all final goods and services produced within a country in a given period of time.
In spite of this definition, some production is left out of GDP. Explain why some final goods and services are not included. ANS:
GDP excludes some products because they are so difficult to measure. These products include services performed by individuals for themselves and their families, and most goods that are produced and consumed at home and, therefore, never enter the marketplace. In addition, illegal products are not included in GDP even if they can be measured because, by society's definition, they are bads, not goods. PTS: 1 DIF: 2 REF: 23-2 TOP: Gross domestic product MSC: Interpretive
Chapter 23/Measuring a Nation's Income ? 1011
2. Explain why it is the case that the value of intermediate goods produced and sold during the year is not included
directly as part of GDP, but the value of intermediate goods produced and not sold is included directly as part of GDP. ANS:
Intermediate goods produced and sold during the year are not included separately as part of GDP because the value of those goods will be included in the value of the final goods produced from them. If the intermediate good is produced but not sold during the year, its value is included as inventory investment for the year in which it was produced. If inventory investment was not included as part of GDP, true production would be underestimated for the year the intermediate good went into inventory, and overestimated for the year the intermediate good is used or sold. PTS: 1 DIF: 2 REF: 23-2
TOP: Intermediate goods | Gross domestic product MSC: Interpretive
3. Since it is counted as investment, why doesn't the purchase of earthmoving equipment from China by a U.S. corporation increase U.S. GDP? ANS:
The purchase of foreign equipment is counted as investment, but GDP measures only the value of production within the geographic borders of the United States. In order to avoid including the value of the imported equipment, imports are subtracted from GDP. Hence, the value of the equipment in investment is canceled by subtracting its value as an import. PTS: 1 DIF: 2 REF: 23-3 TOP: Investment | Gross domestic product MSC: Applicative
4. Identify the immediate effect of each of the following events on U.S. GDP and its components.
a. James receives a Social Security check. b. John buys an Italian sports car.
c. Henry buys domestically produced tools for his construction company. ANS:
a. Since this is a transfer payment, there is no change to GDP or to any of its components.
b. Consumption and imports will rise and cancel each other out so that there is no change in U.S. GDP. c. This increases the investment component of GDP and so increases GDP. PTS: 1 DIF: 2 REF: 23-3
TOP: Transfer payments | Net exports | Investment MSC: Applicative
5. Between 1929 and 1933, NNP measured in current prices fell from $96 billion to $48 billion. Over the same period, the relevant price index fell from 100 to 75.
a. What was the percentage decline in nominal NNP from 1929 to1933?
b. What was the percentage decline in real NNP from 1929 to 1933? Show your work. ANS:
a. NNP measured in current prices is nominal NNP. Nominal NNP fell from $96 billion to $48 billion, a decline of
50 percent.
b. Real NNP is nominal NNP divided by the price index and multiplied by 100. Real NNP in 1929 was ($96 b/100)
× 100 = $96 b. Real NNP in 1933 was ($48 b/75) 100 = $64 b. Real NNP fell from $96 billion to $64 billion, a decline of 33 percent.
PTS: 1 DIF: 2 REF: 23-4 TOP: Net national product | GDP deflator MSC: Applicative
6. You find that your paycheck for the year is higher this year than last. Does that mean that your real income has
increased? Explain carefully. ANS:
Real income is nominal income adjusted for general increase in prices. If my paycheck is higher this year than last, my nominal income has increased. Whether my real income has increased or not depends on what has happened since last year to the level of prices of things I buy with my income. If the percentage increase in prices is less than the percentage increase in my nominal income, then my real income has increased. Otherwise, my real income has not increased. PTS: 1 DIF: 2 REF: 23-4 TOP: Income MSC: Interpretive
1012 ? Chapter 23/Measuring a Nation's Income
7. U.S. real GDP is substantially higher today than it was 60 years ago. What does this tell us, and what does it not tell
us, about the well-being of U.S. residents? ANS:
Since this is in real terms, it tells us that the U.S. is able to make a lot more stuff than in the past. Some of the increase in real GDP is probably due to an increase in population, so we could say more if we knew what had happened to real GDP per person. Supposing that there was also an increase in real GDP per person, we can say that the standard of living has risen. Material things are an important part of well-being. Having sufficient amounts of things such as food, shelter, and clothing are fundamental to well-being. Other things such as security, a safe environment, access to safe water, access to medical care, justice, and freedom also matter. However, many of these things are more easily obtained by being able to produce more using fewer resources. Countries with higher real GDP per person tend to have longer life spans, less discrimination towards women, less child labor, and a higher rate of literacy. PTS: 1 DIF: 2 REF: 23-5 TOP: Real GDP | Economic welfare
MSC: Interpretive
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