Q: If nominal GDP in a given year is $$1,200$$ billion and real GDP (using base-year prices) is $$1,000$$ billion, what is the GDP deflator for that year?

$$GDP\ deflator = \frac{1,200}{1,000} \times 100 = 120$$

Question 1

Which of the following best explains why only final goods are included in the calculation of GDP, rather than all goods sold by firms?

Accepted Answer

Including all goods would result in double counting, as intermediate goods are used in the production of final goods.

Question 2

Suppose a steel producer sells steel to a car manufacturer for $$1,000, and the car manufacturer sells the finished car for 20$$,000. What is the value added by the car manufacturer?

Accepted Answer

$19,000

Question 3

Which formula correctly represents the calculation of GDP from the expenditure side?

Accepted Answer

$$GDP = C + I + G + NX$$

Question 4

If nominal GDP in a given year is $$1,200$$ billion and real GDP (using base-year prices) is $$1,000$$ billion, what is the GDP deflator for that year?

Accepted Answer

$$GDP\ deflator = \frac{1,200}{1,000} 	imes 100 = 120$$

Question 5

Which of the following is NOT included in the calculation of GDP from the expenditure side?

Accepted Answer

Government transfer payments

Question 6

A country’s GDP increases, but the GDP deflator remains unchanged. What does this imply?

Accepted Answer

The increase in GDP is entirely due to an increase in real output.

Question 7

Which of the following is an example of an omission from official GDP measurement?

Accepted Answer

Illegal activities and home production

Question 8

Why is real per capita GDP considered a good but incomplete measure of living standards?

Accepted Answer

It measures average material living standards but omits non-market activities and overall well-being.

Question 9

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

Accepted Answer

Nominal GDP is measured using current prices, while real GDP uses base-year prices.

Question 10

If a country’s nominal GDP increases by 5% and its real GDP increases by 2%, what can be inferred about the average price level?

Accepted Answer

The average price level has increased by 3%.

Question 11

Which of the following is a component of factor incomes in the income approach to GDP?

Accepted Answer

Business profits

Question 12

A government pays subsidies to firms. How are these subsidies treated in the income approach to GDP?

Accepted Answer

They are subtracted from indirect taxes.

Question 13

Which of the following best explains the purpose of the 'statistical discrepancy' in national income accounting?

Accepted Answer

To ensure that the independently measured income and expenditure totals for GDP match.

Question 14

If gross investment in a year is $$500$$ million and depreciation is $$100$$ million, what is net investment?

Accepted Answer

$$400$$ million

Question 15

Which of the following is true about the GDP deflator and the Consumer Price Index (CPI)?

Accepted Answer

The GDP deflator measures the average price of all goods produced domestically, while the CPI measures the average price of consumer goods.

Question 16

A country’s GDP is calculated using the income approach. Which of the following must be included in the calculation?

Accepted Answer

Depreciation

Question 17

Why might GDP not accurately reflect changes in economic activity related to the underground economy?

Accepted Answer

GDP excludes illegal and unreported transactions, which can be significant in some economies.

Question 18

Which of the following is an example of a final good in the context of GDP measurement?

Accepted Answer

A new car sold to a consumer

Question 19

If a country’s real GDP per capita increases, which of the following is most likely true?

Accepted Answer

Average material living standards have improved.

Question 20

Which of the following is a reason why national income accounting involves arbitrary decisions?

Accepted Answer

Compromises must be made between consistent definitions and measurable magnitudes.

Chapter 5: The Measurement of National Income – Macroeconomics Study Notes

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