Q: Suppose an economy produces only hot dogs and hamburgers. In 2021, the price of a hot dog is $2 and 100 hot dogs are sold; the price of a hamburger is $3 and 150 hamburgers are sold. In 2022, the price of a hot dog rises to $3 and 120 hot dogs are sold; the price of a hamburger rises to $4 and 180 hamburgers are sold. Using 2021 as the base year, what is the real GDP in 2022?

$120 \times 2 + 180 \times 3 = $720$

Q: If nominal GDP in 2022 is $900 and real GDP in 2022 is $720, what is the GDP deflator for 2022?

$\frac{900}{720} \times 100 = 125$

Question 1

Suppose an economy produces only hot dogs and hamburgers. In 2021, the price of a hot dog is $2 and 100 hot dogs are sold; the price of a hamburger is $3 and 150 hamburgers are sold. In 2022, the price of a hot dog rises to $3 and 120 hot dogs are sold; the price of a hamburger rises to $4 and 180 hamburgers are sold. Using 2021 as the base year, what is the real GDP in 2022?

Accepted Answer

$120 	imes 2 + 180 	imes 3 = $720$

Question 2

Which of the following best describes the difference between nominal GDP and real GDP?

Accepted Answer

Nominal GDP values output using current prices, while real GDP uses constant prices.

Question 3

If nominal GDP in 2022 is $900 and real GDP in 2022 is $720, what is the GDP deflator for 2022?

Accepted Answer

$\frac{900}{720} 	imes 100 = 125$

Question 4

The inflation rate between two years is calculated using the GDP deflator as:

Accepted Answer

$\frac{GDP\ deflator\ in\ yr\ 2 - GDP\ deflator\ in\ yr\ 1}{GDP\ deflator\ in\ yr\ 1}$

Question 5

If all quantities produced in an economy rise by 5 percent and all prices fall by 5 percent, which of the following best describes what occurs?

Accepted Answer

Real GDP rises by 5 percent, while nominal GDP falls by 5 percent.

Question 6

Which of the following is NOT included in GDP?

Accepted Answer

The value of home production, such as a parent homeschooling their child.

Question 7

GDP per person is often used as a measure of economic well-being. Which of the following is a limitation of using GDP per person for this purpose?

Accepted Answer

GDP per person does not account for the distribution of income among individuals.

Question 8

Robert Kennedy criticized GDP as a measure of well-being because:

Accepted Answer

It measures everything except that which makes life worthwhile.

Question 9

Suppose real GDP in a country increases steadily over several decades, but the GDP per person remains unchanged. What could explain this outcome?

Accepted Answer

The population is growing at the same rate as real GDP.

Question 10

Which of the following statements about GDP and economic well-being is most accurate?

Accepted Answer

GDP omits important factors such as leisure, environmental quality, and income distribution.

Question 11

If Mr. Keating quits his job as a teacher to homeschool his own children, what happens to GDP?

Accepted Answer

GDP falls because his market income decreases.

Question 12

Which of the following is a reason why GDP is considered an imperfect measure of well-being?

Accepted Answer

GDP ignores the environmental degradation from economic activity.

Question 13

A country has a GDP deflator of 120 in year 1 and 132 in year 2. What is the inflation rate between these two years?

Accepted Answer

$\frac{132 - 120}{120} = 0.10$ or $10\%$

Question 14

Which of the following would cause nominal GDP to increase but not real GDP?

Accepted Answer

An increase in the price level, with output remaining constant.

Question 15

Why do economists use real GDP rather than nominal GDP to compare economic output over time?

Accepted Answer

Real GDP adjusts for changes in the price level, allowing for comparison of actual output.

Question 16

Which of the following is most likely to be omitted from GDP calculations?

Accepted Answer

The value of unpaid volunteer work.

Question 17

If a country has a high GDP per capita, which of the following is most likely true?

Accepted Answer

The country generally has better education and health care.

Question 18

Which of the following best explains why GDP is not a complete measure of a nation's well-being?

Accepted Answer

GDP does not account for leisure, environmental quality, or the distribution of income.

Question 19

Suppose a country experiences economic growth that raises real GDP but also increases pollution and reduces leisure time. What does this suggest about the relationship between GDP and well-being?

Accepted Answer

GDP growth may not fully capture changes in well-being due to omitted factors.

Measuring a Nation's Income: Real vs. Nominal GDP and Economic Well-Being

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