$GDP\ deflator = 100 \times \frac{8250}{7200} = 114.6$

$GDP\ deflator = 100 \times \frac{10,800}{8,400} = 128.6$

Question 1

Which of the following best describes the relationship between income and expenditure in the context of GDP?

Accepted Answer

For the economy as a whole, income equals expenditure because every dollar a buyer spends is a dollar of income for the seller.

Question 2

In the circular-flow diagram, which of the following is NOT explicitly represented?

Accepted Answer

The government collecting taxes and buying goods & services.

Question 3

Which of the following transactions would be included in the calculation of GDP?

Accepted Answer

A local restaurant sells a meal to a customer.

Question 4

Why does GDP only include final goods and not intermediate goods?

Accepted Answer

Final goods already embody the value of the intermediate goods used in their production.

Question 5

Which of the following is considered part of 'Investment (I)' in GDP calculations?

Accepted Answer

Buying a new factory building.

Question 6

A government pays unemployment insurance benefits to citizens. How is this transaction treated in GDP accounting?

Accepted Answer

It is excluded from GDP as a transfer payment.

Question 7

Sarah spends $1800 on a new laptop for her publishing business. The laptop was built in China. How does this affect U.S. GDP and its components?

Accepted Answer

It increases U.S. investment but decreases net exports.

Question 8

Which formula correctly represents the calculation of GDP using its components?

Accepted Answer

$Y = C + I + G + NX$

Question 9

If nominal GDP in 2024 is $8250 and real GDP is $7200, what is the GDP deflator for 2024?

Accepted Answer

$GDP\ deflator = 100 	imes \frac{8250}{7200} = 114.6$

Question 10

Which of the following is a limitation of GDP as a measure of economic well-being, according to Joseph Stiglitz?

Accepted Answer

GDP does not value an equitable distribution of income.

Question 11

Suppose the nominal GDP in 2025 is $10,800 and the real GDP is $8,400. Calculate the GDP deflator for 2025.

Accepted Answer

$GDP\ deflator = 100 	imes \frac{10,800}{8,400} = 128.6$

Question 12

Which of the following would be counted as consumption (C) in GDP?

Accepted Answer

A renter pays monthly rent for an apartment.

Question 13

General Motors builds $500 million worth of cars, but only $470 million are sold to consumers. How is this reflected in GDP?

Accepted Answer

GDP increases by $500 million, including both sold and unsold cars as investment in inventory.

Question 14

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

Accepted Answer

Real GDP is adjusted for inflation by using prices from a base year, while nominal GDP uses current prices.

Question 15

If the GDP deflator in 2023 is 100 and in 2024 is 114.6, what is the inflation rate from 2023 to 2024?

Accepted Answer

$Inflation\ rate = 100 	imes \frac{114.6 - 100}{100} = 14.6\%$

Question 16

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

Accepted Answer

Transfer payments such as Social Security benefits.

Question 17

A U.S. company produces software in India and sells it in Europe. How is this production counted in U.S. GDP?

Accepted Answer

It is excluded from U.S. GDP because the production occurs outside U.S. borders.

Question 18

Which of the following would increase net exports (NX) in the GDP calculation?

Accepted Answer

An increase in exports.

Question 19

Which of the following is a reason why GDP is not a perfect measure of economic well-being?

Accepted Answer

GDP does not account for environmental degradation.

Measuring Economic Activity: GDP and Its Components

Study Guide - Practice Questions