Q: Which formula correctly calculates real GDP from nominal GDP and the price index?

$$ \text{Real GDP} = \frac{\text{Nominal GDP}}{\text{Price Index}} \times 100 $$

Question 1

Which of the following best describes the circular flow of income in an economy?

Accepted Answer

Goods and services flow in one direction, and money payments flow in the opposite direction, with every transaction involving an expenditure and a business receipt.

Question 2

Which of the following is NOT included in the calculation of GDP?

Accepted Answer

The sale of used furniture between individuals.

Question 3

Why are profits considered a cost of the factors of production in national income accounting?

Accepted Answer

Profits are the return entrepreneurs receive for the risk they incur when organizing productive activity.

Question 4

Which formula correctly calculates real GDP from nominal GDP and the price index?

Accepted Answer

$$ 	ext{Real GDP} = \frac{	ext{Nominal GDP}}{	ext{Price Index}} 	imes 100 $$

Question 5

If a country’s nominal GDP increases by 10% but the price index also increases by 10%, what happens to real GDP?

Accepted Answer

Real GDP remains unchanged.

Question 6

Which of the following transactions would be counted in GDP?

Accepted Answer

A business purchasing new factory equipment.

Question 7

What is the main difference between nominal GDP and real GDP?

Accepted Answer

Nominal GDP is measured at current market prices, while real GDP is adjusted for changes in the average level of prices.

Question 8

Which equation represents the expenditure approach to calculating GDP?

Accepted Answer

$$ GDP = C + I + G + X $$

Question 9

Suppose a country has a population of 50 million and a real GDP of $1 trillion. What is its per capita real GDP?

Accepted Answer

$$ 20,000 $$

Question 10

Which of the following is an example of an intermediate good?

Accepted Answer

Steel used to manufacture automobiles.

Question 11

Why does adding net exports to U.S. GDP almost always pull down the measured value of GDP?

Accepted Answer

Because imports have exceeded U.S. exports every year since 1970, making net exports negative.

Question 12

Which of the following is NOT a limitation of GDP as a measure of economic performance?

Accepted Answer

GDP includes underground transactions.

Question 13

If depreciation in an economy is $$500 billion and GDP is 2$$,000 billion, what is Net Domestic Product (NDP)?

Accepted Answer

$$ 1,500 $$ billion

Question 14

Which of the following is included in gross private domestic investment?

Accepted Answer

Purchases of newly produced capital goods and changes in business inventories.

Question 15

What is the purpose of adjusting GDP using purchasing power parity (PPP) when comparing international incomes?

Accepted Answer

To account for differences in the true cost of living across countries.

Question 16

Which of the following would be excluded from GDP calculations?

Accepted Answer

Legal underground transactions such as paying in cash for services.

Question 17

If the price index in the base year is 100 and nominal GDP is $500 billion, what is real GDP?

Accepted Answer

$$ 500 $$ billion

Question 18

Which of the following best explains why GDP is not a measure of a nation's wealth?

Accepted Answer

GDP measures the value of a flow of production during a year in terms of market prices, not the stock of assets.

Question 19

Which of the following is the correct formula for per capita real GDP?

Accepted Answer

$$ 	ext{Per capita real GDP} = \frac{	ext{Real GDP}}{	ext{Population}} $$

Question 20

Which alternative measure of economic performance accounts for elements that might counter environmental and human harms associated with increased production?

Accepted Answer

Genuine Progress Indicator (GPI)

Measuring the Economy’s Performance: Macroeconomic Study Notes

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