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1Chapter 4
2Measuring GDP and Economic Growth
31  Gross Domestic Product
41) Gross domestic product is the total ________ produced within a country in a given time period.
5A) market value of all final and intermediate goods and services
6B) market value of all goods and services
7C) amount of final and intermediate goods and services
8D) market value of all final goods and services
9Answer: D
10Topic: GDP
11Skill: Recognition
12Question history: Previous edition, Chapter 4
13AACSB: Reflective Thinking
142) Gross domestic product
15A) includes all the goods and none of the services produced in an economy in a given time
16period.
17B) measures the value of the aggregate production of goods and services in a country during
18a given time period.
19C) measures the value of labor payments generated in an economy in a given time period.
20D) is generally less than federal expenditure in any time period.
21Answer: B
22Topic: GDP
23Skill: Recognition
24Question history: Previous edition, Chapter 4
25AACSB: Reflective Thinking
263) Gross domestic product is a measure of the total value of all
27A) sales in an economy over a period of time.
28B) consumer income in an economy over a period of time.
29C) capital accumulation in an economy over a period of time.
30D) final goods and services produced in an economy over a period of time.
31Answer: D
32Topic: GDP
33Skill: Recognition
34Question history: Previous edition, Chapter 4
35AACSB: Reflective Thinking
36Copyright © 2012 Pearson Education, Inc.
37Chapter 4   Measuring GDP and Economic Growth   493
384) Gross domestic product (GDP) is the ________ in a given time period.
39A) value of personal consumption expenditures, gross private domestic investment, and
40federal government expenditures
41B) sum of wage and salary compensation of employees and corporate profits
42C) value of all final and intermediate goods and services produced by the economy excluding
43those goods exported to foreign nations
44D) market value of final goods and services produced by the economy
45Answer: D
46Topic: GDP
47Skill: Recognition
48Question history: Previous edition, Chapter 4
49AACSB: Reflective Thinking
505) Gross domestic product (GDP) measures the
51A) number of final goods and services produced in the economy in a given time period.
52B) number of final goods and services sold in the economy in a given time period.
53C) market value of old and new final goods and services sold in the economy in a given time
54period.
55D) market value of final goods and services produced in the economy in a given time period.
56Answer: D
57Topic: GDP
58Skill: Recognition
59Question history: Previous edition, Chapter 4
60AACSB: Reflective Thinking
616) GDP is defined as the market value of all ________ in a given time period.
62A) final goods produced in a country
63B) final goods and services produced by citizens of a particular country regardless of where
64in the world they are located
65C) final goods and services produced in a country by only the citizens of the country
66D) final goods and services produced in a country
67Answer: D
68Topic: GDP
69Skill: Recognition
70Question history: Previous edition, Chapter 4
71AACSB: Reflective Thinking
727) In the definition of GDP, ʺmarket valueʺ refers to
73A) valuing production in production units.
74B) not counting intermediate products.
75C) valuing production according to the market price.
76D) when the production took place.
77Answer: C
78Topic: Market Value
79Skill: Recognition
80Question history: Modified 10th edition
81AACSB: Reflective Thinking
82Copyright © 2012 Pearson Education, Inc.
83494   Parkin · Macroeconomics, Tenth Edition
848) In the United States, GDP is typically measured
85A) monthly.
86B) quarterly.
87C) daily.
88D) weekly.
89Answer: B
90Topic: Time Period
91Skill: Recognition
92Question history: Previous edition, Chapter 4
93AACSB: Reflective Thinking
949) If Nike, an American corporation, produces sneakers in Thailand this would
95A) count as part of U.S. GDP since it is a U.S. corporation.
96B) count for both Thailandʹs GDP and U.S. GDP.
97C) add to Thailandʹs GDP but not to U.S. GDP.
98D) add to neither U.S. GDP nor Thailandʹs GDP.
99Answer: C
100Topic: Production
101Skill: Recognition
102Question history: Previous edition, Chapter 4
103AACSB: Reflective Thinking
10410) If Frito Lay, an American snack company, opens a new manufacturing facility in Mexico and
105produces snacks which are distributed in South America, then Mexicoʹs GDP ________ and U.S.
106GDP ________.
107A) increases; does not change
108B) does not change; increases
109C) increases; decreases
110D) increases; increases
111Answer: A
112Topic: Production
113Skill: Recognition
114Question history: New 10th edition
115AACSB: Reflective Thinking
11611) The word ʺfinalʺ in the definition of GDP refers to
117A) not counting intermediate goods or services.
118B) the time period when production took place.
119C) valuing production at market prices.
120D) counting the intermediate goods and services used to produce GDP.
121Answer: A
122Topic: Final Good
123Skill: Recognition
124Question history: Previous edition, Chapter 4
125AACSB: Reflective Thinking
126Copyright © 2012 Pearson Education, Inc.
127Chapter 4   Measuring GDP and Economic Growth   495
12812) A loaf of bread purchased by one of your instructors would be best described as
129A) an intermediate good.
130B) a financial asset.
131C) a used good.
132D) a final good.
133Answer: D
134Topic: Final Good
135Skill: Recognition
136Question history: Previous edition, Chapter 4
137AACSB: Reflective Thinking
13813) Which of the following is a final good?
139A) the memory chips in your new smart phone
140B) a share of IBM stock
141C) flour purchased at the store to bake cookies
142D) flour used by the bakery to bake cookies
143Answer: C
144Topic: Final Good
145Skill: Recognition
146Question history: New 10th edition
147AACSB: Reflective Thinking
14814) In 2011, Ozzie purchased a 2008 Ford Escort from his neighbor for his son, purchased a 2007
149ʺone ownerʺ Camry from Larchmont Toyota for his wife, bought a 2011 new Ford for himself,
150and sold his 2000 Dodge Caravan to his teenage nephew. Which, if any, of these transactions
151will be included in GDP in 2011?
152A) all four transactions
153B) all three purchases but not the sale
154C) the purchase of the Ford and the Caravan
155D) only the purchase of the Ford
156Answer: D
157Topic: Final Good
158Skill: Conceptual
159Question history: Modified 10th edition
160AACSB: Reflective Thinking
16115) Which of the following expenditures associated with the production of a new high-performance
162SUV will be directly included in GDP?
163A) the sale of bonds to finance the construction of the assembly plant
164B) the purchase of used welding robots to assemble to vehicles
165C) the purchase of new tires to be installed on the new vehicles
166D) the purchase of new machine tools to manufacture the engines
167Answer: D
168Topic: Final Good
169Skill: Conceptual
170Question history: Previous edition, Chapter 4
171AACSB: Reflective Thinking
172Copyright © 2012 Pearson Education, Inc.
173496   Parkin · Macroeconomics, Tenth Edition
17416) Intermediate goods are excluded from GDP because
175A) their inclusion would involve double counting.
176B) they represent goods that have never been purchased so they cannot be counted.
177C) their inclusion would understate GDP
178D) the premise of the question is incorrect because intermediate goods are directly included in
179calculating GDP.
180Answer: A
181Topic: Intermediate Goods and Services
182Skill: Recognition
183Question history: Previous edition, Chapter 4
184AACSB: Reflective Thinking
18517) A ton of coal purchased by your local utility to burn to make electricity would be best described
186as
187A) an intermediate good.
188B) a financial asset.
189C) a used good.
190D) a final product.
191Answer: A
192Topic: Intermediate Goods and Services
193Skill: Recognition
194Question history: Previous edition, Chapter 4
195AACSB: Reflective Thinking
19618) Which of the following expenditures is for an intermediate good?
197A) The government buys new tires for its military vehicles.
198B) A U.S. tire firm sells new tires to Canada.
199C) General Motors buys new tires to put on the cars itʹs building.
200D) You buy new tires for your used car.
201Answer: C
202Topic: Intermediate Goods and Services
203Skill: Conceptual
204Question history: Previous edition, Chapter 4
205AACSB: Reflective Thinking
20619) GDP does not directly include intermediate goods because
207A) intermediate goods are not valuable.
208B) intermediate goods are not useful to consumers.
209C) that would count the intermediate goods twice.
210D) that would understate the true size of GDP.
211Answer: C
212Topic: Intermediate Goods and Services
213Skill: Conceptual
214Question history: Previous edition, Chapter 4
215AACSB: Reflective Thinking
216Copyright © 2012 Pearson Education, Inc.
217Chapter 4   Measuring GDP and Economic Growth   497
21820) The calculation of the final goods and services sold in an economy would NOT include
219A) the purchase of a lawnmower by a household.
220B) General Motorsʹ purchases of tires for new automobiles.
221C) Ford Motor Companyʹs purchase of a new industrial robot to be used to produce cars.
222D) the purchase of a service by a household.
223Answer: B
224Topic: Intermediate Goods and Services
225Skill: Conceptual
226Question history: Previous edition, Chapter 4
227AACSB: Reflective Thinking
22821) In computing GDP, it is essential to
229A) avoid double counting.
230B) include government transfer payments.
231C) include government tax revenues.
232D) count all intermediate products directly as they are produced.
233Answer: A
234Topic: Intermediate Goods and Services
235Skill: Conceptual
236Question history: Previous edition, Chapter 4
237AACSB: Reflective Thinking
23822) Double counting (counting the same thing twice) in GDP accounting is avoided by not including
239A) net exports.
240B) intermediate goods.
241C) illegal activities.
242D) depreciation.
243Answer: B
244Topic: Intermediate Goods and Services
245Skill: Conceptual
246Question history: Previous edition, Chapter 4
247AACSB: Reflective Thinking
24823) GDP counts only final goods and services because this
249A) method avoids including any goods that are produced this year and sold next year.
250B) method avoids double counting of goods going through several stages of production.
251C) amount can be more easily determined in the marketplace.
252D) method avoids understating the value of GDP produced during a given year.
253Answer: B
254Topic: Final Goods and Intermediate Goods
255Skill: Recognition
256Question history: Previous edition, Chapter 4
257AACSB: Reflective Thinking
258Copyright © 2012 Pearson Education, Inc.
259498   Parkin · Macroeconomics, Tenth Edition
26024) The circular flow model shows that consumer goods and services produced by business firms
261are sold in the
262A) goods market.
263B) factor market.
264C) labor market.
265D) financial market.
266Answer: A
267Topic: Circular Flow
268Skill: Recognition
269Question history: Previous edition, Chapter 4
270AACSB: Reflective Thinking
27125) The factor market can best be described as where
272A) households buy goods and services.
273B) firms buy goods and services.
274C) firms buy the services of labor, land and capital.
275D) governments sell goods and services.
276Answer: C
277Topic: Circular Flow
278Skill: Recognition
279Question history: Previous edition, Chapter 4
280AACSB: Reflective Thinking
28126) In the circular flow of income
282A) households demand goods and services that are supplied by firms, and the firms demand
283factors that are supplied by intermediate firms.
284B) households demand goods and services that are supplied by firms, while supplying
285factors that are demanded by firms.
286C) households sell goods and services while firms sell factors.
287D) households buy goods and services while firms sell goods and services. Firms obtain labor
288from households, capital from government, and raw materials from other firms.
289Answer: B
290Topic: Circular Flow
291Skill: Recognition
292Question history: Previous edition, Chapter 4
293AACSB: Reflective Thinking
29427) The circular flow shows that the household sector earns its income by
295A) selling factors of production.
296B) buying factors of production.
297C) selling goods and services.
298D) selling financial assets.
299Answer: A
300Topic: Circular Flow
301Skill: Recognition
302Question history: Previous edition, Chapter 4
303AACSB: Reflective Thinking
304Copyright © 2012 Pearson Education, Inc.
305Chapter 4   Measuring GDP and Economic Growth   499
30628) The circular flow of income shows that
307A) households transact only in the goods market.
308B) governments purchase goods and services.
309C) firms generally are the demanders in the goods markets and suppliers in the factor
310markets.
311D) None of the above answers is correct.
312Answer: B
313Topic: Circular Flow
314Skill: Recognition
315Question history: Previous edition, Chapter 4
316AACSB: Reflective Thinking
31729) Which of the following is true regarding the circular flow diagram?
318I. ʺAggregate incomeʺ is the flow of income earned by firms.
319II. Retained earnings are considered income earned by firms rather than part of householdsʹ
320income.
321III. The government, households, and firms all have transactions in the goods market.
322A) I only
323B) I and II
324C) I and III
325D) III only
326Answer: D
327Topic: Circular Flow
328Skill: Conceptual
329Question history: Modified 10th edition
330AACSB: Reflective Thinking
33130) If we compare the four sources of spending in the economy we see that
332A) household consumption is the smallest.
333B) government expenditure is the largest.
334C) business investment is the largest.
335D) household consumption is the largest.
336Answer: D
337Topic: Circular Flow
338Skill: Recognition
339Question history: Previous edition, Chapter 4
340AACSB: Reflective Thinking
34131) Compared to the other sources of spending, net exports is
342A) large and negative.
343B) small and negative.
344C) large and positive.
345D) small and positive.
346Answer: B
347Topic: Circular Flow
348Skill: Recognition
349Question history: Previous edition, Chapter 4
350AACSB: Reflective Thinking
351Copyright © 2012 Pearson Education, Inc.
352500   Parkin · Macroeconomics, Tenth Edition
35332) The circular flow diagram shows that
354A) the flow of payments to the factors used to produce goods and services exceeds the flow of
355payments for final goods and services.
356B) goods and factor markets are independent.
357C) the total amount of income generated by the economy equals the total purchases of final
358goods and services.
359D) consumption expenditure equals saving.
360Answer: C
361Topic: Circular Flow
362Skill: Recognition
363Question history: Previous edition, Chapter 4
364AACSB: Reflective Thinking
36533) The circular flow diagram shows
366A) how nominal GDP is distinct from real GDP.
367B) how the prices of factors are determined.
368C) the effects of inflation in a simple economy.
369D) the flows between different sectors of the economy.
370Answer: D
371Topic: Circular Flows
372Skill: Conceptual
373Question history: Previous edition, Chapter 4
374AACSB: Reflective Thinking
37534) The circular flow diagram indicates that
376A) households sell the services of factors of production to firms.
377B) firms buy the services of factors of production from the government.
378C) households sell goods and services to the government.
379D) firms buy goods and services from households.
380Answer: A
381Topic: Circular Flows
382Skill: Conceptual
383Question history: Previous edition, Chapter 4
384AACSB: Reflective Thinking
38535) In the circular flow model of an economy, households
386A) receive income from buyers of goods and services.
387B) receive income from the sale of factors in the goods markets.
388C) pay firms for the use of their factors.
389D) receive income from producers for the use of factors in the factor markets.
390Answer: D
391Topic: Circular Flows
392Skill: Conceptual
393Question history: Modified 10th edition
394AACSB: Reflective Thinking
395Copyright © 2012 Pearson Education, Inc.
396Chapter 4   Measuring GDP and Economic Growth   501
39736) In the circular flow diagram, aggregate expenditure includes the sum of
398A) saving and investment.
399B) consumption and investment.
400C) consumption, investment, and saving.
401D) income and saving.
402Answer: B
403Topic: Circular Flow, Aggregate Expenditures
404Skill: Conceptual
405Question history: Previous edition, Chapter 4
406AACSB: Reflective Thinking
40737) In the circular flow of economic activity
408A) aggregate expenditure measures the dollar value of purchases of factors.
409B) aggregate expenditure measures the dollar value of purchases of final goods and services.
410C) aggregate income measures the dollar value of labor resources only.
411D) aggregate expenditure is measured as it moves through the financial markets.
412Answer: B
413Topic: Circular Flow, Aggregate Expenditures
414Skill: Conceptual
415Question history: Previous edition, Chapter 4
416AACSB: Reflective Thinking
41738) In the circular flow diagram, aggregate expenditure includes
418A) consumption expenditure, saving, investment and government expenditure
419B) consumption expenditure, saving, investment and net exports
420C) consumption expenditure, investment, government expenditure and net exports
421D) consumption expenditure, saving, government expenditure and net exports
422Answer: C
423Topic: Circular Flow, Aggregate Expenditures
424Skill: Recognition
425Question history: New 10th edition
426AACSB: Reflective Thinking
427Copyright © 2012 Pearson Education, Inc.
428502   Parkin · Macroeconomics, Tenth Edition
42939) In the above figure, flow B represents ________.
430A) household purchases of goods and services
431B) household borrowing
432C) household income
433D) firmsʹ payments for labor services
434Answer: A
435Topic: Circular Flow
436Skill: Analytical
437Question history: Previous edition, Chapter 4
438AACSB: Reflective Thinking
43940) In the above figure, flow B represents householdsʹ ________.
440A) income
441B) consumption expenditures
442C) saving
443D) investment
444Answer: B
445Topic: Circular Flow
446Skill: Analytical
447Question history: Previous edition, Chapter 4
448AACSB: Reflective Thinking
449Copyright © 2012 Pearson Education, Inc.
450Chapter 4   Measuring GDP and Economic Growth   503
45141) In the above figure, household income is shown by flow
452A) A.
453B) B.
454C) C.
455D) F.
456Answer: A
457Topic: Circular Flow
458Skill: Analytical
459Question history: Previous edition, Chapter 4
460AACSB: Reflective Thinking
46142) In the above figure, consumption expenditure is shown by flow
462A) A.
463B) B.
464C) C.
465D) F.
466Answer: B
467Topic: Circular Flow
468Skill: Analytical
469Question history: Previous edition, Chapter 4
470AACSB: Reflective Thinking
47143) Which of the following are equal to one another?
472I. aggregate production
473II. aggregate expenditure
474III. aggregate income
475A) I equals II, but not III.
476B) I equals III, but not II.
477C) II equals III, but not I.
478D) I equals II equals III.
479Answer: D
480Topic: Expenditure Equals Income
481Skill: Conceptual
482Question history: Previous edition, Chapter 4
483AACSB: Reflective Thinking
48444) Choose the best statement.
485A) GDP equals aggregate expenditure and equals aggregate income.
486B) An increase in government purchases increases aggregate expenditure but does not
487change GDP.
488C) An increase in compensation of employees increases aggregate income but does not
489change GDP.
490D) GDP always equals aggregate expenditure and sometimes equals aggregate income.
491Answer: A
492Topic: Expenditure Equals Income
493Skill: Conceptual
494Question history: Previous edition, Chapter 4
495AACSB: Reflective Thinking
496Copyright © 2012 Pearson Education, Inc.
497504   Parkin · Macroeconomics, Tenth Edition
49845) According to the circular flow diagram, the dollar value of a nationʹs output is equal to
499A) profits.
500B) total income.
501C) net income minus taxes.
502D) wages.
503Answer: B
504Topic: Expenditure Equals Income
505Skill: Recognition
506Question history: Previous edition, Chapter 4
507AACSB: Reflective Thinking
50846) Total output and total income in the circular flow model
509A) are measures of the economyʹs level of savings.
510B) include only intermediate goods.
511C) are equal to each other.
512D) are related because national income is less than national product.
513Answer: C
514Topic: Expenditure Equals Income
515Skill: Recognition
516Question history: Previous edition, Chapter 4
517AACSB: Reflective Thinking
51847) The circular flow shows that
519A) aggregate production equals aggregate expenditure.
520B) aggregate expenditure is less than aggregate income.
521C) GDP equals aggregate income.
522D) Both answers A and C are correct.
523Answer: D
524Topic: Expenditure Equals Income
525Skill: Conceptual
526Question history: Previous edition, Chapter 4
527AACSB: Reflective Thinking
52848) Comparing aggregate expenditure and aggregate incomes shows that
529A) aggregate expenditure is usually greater than aggregate income.
530B) aggregate income is usually greater than aggregate expenditure.
531C) they are equal.
532D) aggregate income can not equal aggregate expenditure if we have any savings.
533Answer: C
534Topic: Expenditure Equals Income
535Skill: Conceptual
536Question history: Previous edition, Chapter 4
537AACSB: Reflective Thinking
538Copyright © 2012 Pearson Education, Inc.
539Chapter 4   Measuring GDP and Economic Growth   505
54049) Gross domestic product (GDP) is
541A) the value of all final goods and services produced in a country during a year.
542B) the sum of consumption expenditure, investment, government expenditure on goods and
543services, and net exports.
544C) the sum of compensation of employees, proprietorsʹ income, net interest, rental income,
545corporate profits, depreciation, and indirect business taxes minus subsidies.
546D) all of the above
547Answer: D
548Topic: Expenditure Equals Income
549Skill: Recognition
550Question history: Previous edition, Chapter 4
551AACSB: Reflective Thinking
55250) Gross domestic product can be calculated
553A) either by valuing the nationʹs output of goods and services or by valuing the income
554generated in the production process.
555B) by adding up the personal consumption of all members of the society.
556C) by adding up the value of all intermediate goods used in the economy.
557D) by adding up the income tax returns of all members of the society.
558Answer: A
559Topic: Expenditure Equals Income
560Skill: Recognition
561Question history: Previous edition, Chapter 4
562AACSB: Reflective Thinking
56351) Gross domestic product is the
564A) value of the final goods and services produced in a country during a specific time.
565B) total amount that buyers spent on the final goods and services produced in a country
566during a specific time.
567C) total amount of income earned in producing the final goods and services in a country
568during a specific time.
569D) All of the above answers are correct.
570Answer: D
571Topic: Expenditure Equals Income
572Skill: Recognition
573Question history: Previous edition, Chapter 4
574AACSB: Reflective Thinking
57552) Which of the following is correct?
576A) Aggregate expenditure equals GDP but is less than aggregate income.
577B) Aggregate income is greater than GDP but equal to aggregate expenditure.
578C) Aggregate income is greater than aggregate expenditure but equal to GDP.
579D) Aggregate income, aggregate expenditure and GDP are all equal.
580Answer: D
581Topic: Expenditure Equals Income
582Skill: Recognition
583Question history: Previous edition, Chapter 4
584AACSB: Reflective Thinking
585Copyright © 2012 Pearson Education, Inc.
586506   Parkin · Macroeconomics, Tenth Edition
58753) GDP equals
588A) C+S+G+(X-M)
589B) C+I+G+(X+M)
590C) C+I+G+(X-M)
591D) C+S+G+(X-M)
592Answer: C
593Topic: Expenditure Equals Income
594Skill: Recognition
595Question history: New 10th edition
596AACSB: Reflective Thinking
59754) Depreciation is defined as the
598A) decrease in the stock of capital due to wear and tear.
599B) increase in the stock of capital due to investment by firms.
600C) increase in the stock of capital due to wear and tear.
601D) decrease in the stock of capital due to investment by firms.
602Answer: A
603Topic: Depreciation
604Skill: Recognition
605Question history: Previous edition, Chapter 4
606AACSB: Reflective Thinking
60755) Suppose Mail Boxes Etc. buys a new copier for its store for $1000. A year later, when the firm
608wants to upgrade to a new copier, it finds that the old copier is only worth $750. Over the year
609the copier was used, ________ has occurred.
610A) replacement investment
611B) gross investment
612C) depreciation
613D) net investment
614Answer: C
615Topic: Depreciation
616Skill: Conceptual
617Question history: Previous edition, Chapter 4
618AACSB: Reflective Thinking
61956) Net investment equals
620A) capital stock minus depreciation.
621B) gross investment minus depreciation.
622C) the total quantity of plant, equipment and buildings.
623D) gross investment/depreciation.
624Answer: B
625Topic: Net Investment and Gross Investment
626Skill: Recognition
627Question history: Previous edition, Chapter 4
628AACSB: Reflective Thinking
629Copyright © 2012 Pearson Education, Inc.
630Chapter 4   Measuring GDP and Economic Growth   507
63157) Which of the following relationships is correct?
632A) Net Investment = Gross Investment + Depreciation
633B) Consumption expenditure = Net Investment - Depreciation
634C) Gross Investment = Net Investment + Depreciation
635D) Depreciation = Gross Investment - Consumption expenditure
636Answer: C
637Topic: Net Investment and Gross Investment
638Skill: Recognition
639Question history: Modified 10th edition
640AACSB: Reflective Thinking
64158) Gross investment equals net investment plus
642A) capital.
643B) capital gains.
644C) depreciation.
645D) dividends paid to the owners of the company.
646Answer: C
647Topic: Net Investment and Gross Investment
648Skill: Recognition
649Question history: Previous edition, Chapter 4
650AACSB: Reflective Thinking
65159) Gross investment is equal to
652A) depreciation minus net investment.
653B) net investment plus capital stock.
654C) depreciation plus net investment.
655D) net investment minus capital stock.
656Answer: C
657Topic: Net Investment and Gross Investment
658Skill: Recognition
659Question history: Previous edition, Chapter 4
660AACSB: Reflective Thinking
66160) Gross investment equals
662A) net investment - depreciation + change in inventories.
663B) net investment + depreciation.
664C) net investment + change in inventories.
665D) depreciation + change in inventories.
666Answer: B
667Topic: Net Investment and Gross Investment
668Skill: Recognition
669Question history: Previous edition, Chapter 4
670AACSB: Reflective Thinking
671Copyright © 2012 Pearson Education, Inc.
672508   Parkin · Macroeconomics, Tenth Edition
67361) ________ is gross investment minus ________.
674A) The capital stock; net investment
675B) The capital stock; depreciation
676C) Depreciation; replacement investment
677D) Net investment; depreciation
678Answer: D
679Topic: Net Investment and Gross Investment
680Skill: Recognition
681Question history: Previous edition, Chapter 4
682AACSB: Reflective Thinking
68362) The difference between gross investment and net investment is
684A) the capital stock.
685B) depreciation.
686C) the real interest rate.
687D) equal to saving.
688Answer: B
689Topic: Net Investment and Gross Investment
690Skill: Recognition
691Question history: Modified 10th edition
692AACSB: Reflective Thinking
69363) If depreciation is less than gross investment, then net investment is
694A) positive.
695B) negative.
696C) zero.
697D) This situation could never occur because it is impossible for depreciation to be less than
698gross investment.
699Answer: A
700Topic: Net Investment and Gross Investment
701Skill: Conceptual
702Question history: Previous edition, Chapter 4
703AACSB: Reflective Thinking
70464) Net investment
705A) equals gross investment plus depreciation.
706B) is the only measure of investment used to calculate GDP.
707C) equals gross investment minus depreciation.
708D) is equivalent to the existing capital stock in the economy.
709Answer: C
710Topic: Net Investment and Gross Investment
711Skill: Recognition
712Question history: Previous edition, Chapter 4
713AACSB: Reflective Thinking
714Copyright © 2012 Pearson Education, Inc.
715Chapter 4   Measuring GDP and Economic Growth   509
71665) Net investment equals
717A) gross investment + depreciation.
718B) depreciation + addition to inventories.
719C) savings - depreciation.
720D) gross investment - depreciation.
721Answer: D
722Topic: Net Investment and Gross Investment
723Skill: Recognition
724Question history: Previous edition, Chapter 4
725AACSB: Reflective Thinking
72666) Net investment is the
727A) total amount of gross investment minus depreciation.
728B) value of software and other network related products.
729C) profit or loss in the stock market.
730D) value of the depreciated capital multiplied by the changes in the price level.
731Answer: A
732Topic: Net Investment and Gross Investment
733Skill: Recognition
734Question history: Previous edition, Chapter 4
735AACSB: Reflective Thinking
73667) Which of the following is NOT a final good?
737A) a new computer sold to an NYU student
738B) a new car sold to Avis for use in their fleet of rental cars
739C) a purse sold to a foreign visitor
740D) a hot dog sold to a spectator at a Chicago Bears football game
741Answer: B
742Topic: Study Guide Question, GDP
743Skill: Conceptual
744Question history: Previous edition, Chapter 4
745AACSB: Reflective Thinking
74668) GDP equals
747A) aggregate expenditure.
748B) aggregate income.
749C) the value of the aggregate production in a country during a given time period.
750D) all of the above
751Answer: D
752Topic: Study Guide Question, Expenditure Equals Income
753Skill: Conceptual
754Question history: Previous edition, Chapter 4
755AACSB: Reflective Thinking
756Copyright © 2012 Pearson Education, Inc.
757510   Parkin · Macroeconomics, Tenth Edition
7582  Measuring U.S. GDP
7591) Two methods of measuring GDP are
760A) the income approach and the expenditure approach.
761B) the income approach and the receipts approach.
762C) the goods approach and the services approach.
763D) the saving approach and the investment approach.
764Answer: A
765Topic: Measuring U.S. GDP
766Skill: Recognition
767Question history: Previous edition, Chapter 4
768AACSB: Reflective Thinking
7692) GDP can be computed as the sum of
770A) all sales that have taken place in an economy over a period of time.
771B) the total expenditures of consumers and business over a period of time.
772C) the total expenditures of consumption, investment, and government expenditure on goods
773and services over a period of time.
774D) the total expenditures of consumption, investment, government expenditure on goods and
775services, and net exports over a period of time.
776Answer: D
777Topic: Expenditure Approach
778Skill: Recognition
779Question history: Previous edition, Chapter 4
780AACSB: Reflective Thinking
7813) GDP using the expenditure approach equals the sum of personal consumption expenditures
782plus
783A) gross private investment.
784B) gross private investment plus government expenditure on goods and services.
785C) gross private investment plus government expenditure on goods and services minus
786imports of goods and services.
787D) gross private investment plus government expenditure on goods and services plus net
788exports of goods and services.
789Answer: D
790Topic: Expenditure Approach
791Skill: Recognition
792Question history: Previous edition, Chapter 4
793AACSB: Reflective Thinking
794Copyright © 2012 Pearson Education, Inc.
795Chapter 4   Measuring GDP and Economic Growth   511
7964) The expenditure approach measures GDP by adding
797A) compensation of employees, rental income, corporate profits, net interest, and proprietorsʹ
798income.
799B) compensation of employees, rental income, corporate profits, net interest, proprietorsʹ
800income, subsidies paid by the government, indirect taxes paid, and depreciation.
801C) compensation of employees, rental income, corporate profits, net interest, proprietorsʹ
802income, indirect taxes paid, and depreciation and subtracting subsidies paid by the
803government.
804D) consumption expenditure, gross private domestic investment, net exports of goods and
805services, and government expenditure on goods and services.
806Answer: D
807Topic: Expenditure Approach
808Skill: Recognition
809Question history: Previous edition, Chapter 4
810AACSB: Reflective Thinking
8115) The four categories of expenditure used by the expenditure approach method to calculate GDP
812are
813A) consumption expenditure, taxes, saving and investment.
814B) consumption expenditure, investment, net imports and saving.
815C) saving, taxes, government expenditure and investment.
816D) consumption expenditure, investment, government expenditure and net exports.
817Answer: D
818Topic: Expenditure Approach
819Skill: Recognition
820Question history: Previous edition, Chapter 4
821AACSB: Reflective Thinking
8226) In the equation, GDP = C + I + G + X - M, G refers to
823A) federal government expenditures plus all transfer payments.
824B) local, state, and federal government spending for all purposes.
825C) the taxes and expenditures of all government units.
826D) local, state, and federal government expenditure on goods and services, but does not
827include transfer payments.
828Answer: D
829Topic: Expenditure Approach
830Skill: Recognition
831Question history: Previous edition, Chapter 4
832AACSB: Reflective Thinking
8337) The components of the expenditure approach to measuring GDP include all of the following
834EXCEPT
835A) net exports.
836B) government expenditure on goods and services.
837C) investment.
838D) the implicit payments for unpaid household work.
839Answer: D
840Topic: Expenditure Approach
841Skill: Recognition
842Question history: Previous edition, Chapter 4
843AACSB: Reflective Thinking
844Copyright © 2012 Pearson Education, Inc.
845512   Parkin · Macroeconomics, Tenth Edition
8468) All of the following are components of the expenditure approach to measuring GDP EXCEPT
847A) Shaniqʹs purchase of a meal at the Olive Garden in Atlanta.
848B) a Senator from Iowa being paid the monthly salary.
849C) the army buying new M1 Abram tanks.
850D) Ford Motor Company buying new Dell computers for use in its marketing department in
851Dearborn, Michigan.
852Answer: B
853Topic: Expenditure Approach
854Skill: Analytical
855Question history: New 10th edition
856AACSB: Analytical Skills
8579) The largest component of GDP in the expenditure approach is
858A) personal consumption expenditures.
859B) gross private domestic investment.
860C) government expenditure on goods and services.
861D) net exports.
862Answer: A
863Topic: Expenditure Approach, Consumption Expenditures
864Skill: Recognition
865Question history: Previous edition, Chapter 4
866AACSB: Reflective Thinking
86710) Of the following, the largest component of GDP is
868A) personal consumption expenditure.
869B) gross private domestic investment.
870C) government expenditure on goods and services.
871D) net exports of goods and services.
872Answer: A
873Topic: Expenditure Approach, Consumption Expenditures
874Skill: Recognition
875Question history: Previous edition, Chapter 4
876AACSB: Reflective Thinking
87711) Which of the following is NOT part of the expenditure approach to measuring GDP?
878A) gross private domestic investment
879B) net exports of goods and services
880C) net interest
881D) personal consumption expenditures
882Answer: C
883Topic: Expenditure Approach
884Skill: Recognition
885Question history: Previous edition, Chapter 4
886AACSB: Reflective Thinking
887Copyright © 2012 Pearson Education, Inc.
888Chapter 4   Measuring GDP and Economic Growth   513
88912) To measure GDP using the expenditure approach you must collect data on
890A) inflation.
891B) exports.
892C) wages.
893D) saving.
894Answer: B
895Topic: Expenditure Approach
896Skill: Recognition
897Question history: Previous edition, Chapter 4
898AACSB: Reflective Thinking
89913) Aggregate expenditures include all of the following EXCEPT
900A) consumption of food.
901B) purchases of intermediate goods.
902C) purchases of a piece of capital equipment.
903D) purchases of guns by the government.
904Answer: B
905Topic: Expenditure Approach
906Skill: Recognition
907Question history: Previous edition, Chapter 4
908AACSB: Reflective Thinking
90914) Gross Domestic Product is equal to the sum of consumption expenditure, investment, net
910exports, and ________.
911A) government expenditures on goods and services
912B) saving
913C) profits
914D) net taxes
915Answer: A
916Topic: Expenditure Approach
917Skill: Recognition
918Question history: Previous edition, Chapter 4
919AACSB: Reflective Thinking
92015) Which of the following items is not a component of the expenditure approach to measuring U.S.
921GDP?
922A) purchases of food made by families
923B) social security payments made by the government
924C) purchases of U.S.-made movies by Europeans
925D) purchases of new homes made by families
926Answer: B
927Topic: Expenditure Approach
928Skill: Recognition
929Question history: Previous edition, Chapter 4
930AACSB: Reflective Thinking
931Copyright © 2012 Pearson Education, Inc.
932514   Parkin · Macroeconomics, Tenth Edition
93316) In the expenditure approach to GDP, the largest component is
934A) government expenditure on goods and services.
935B) personal consumption expenditures.
936C) gross private domestic investment.
937D) net exports.
938Answer: B
939Topic: Expenditure Approach
940Skill: Conceptual
941Question history: Previous edition, Chapter 4
942AACSB: Reflective Thinking
94317) Let C represent consumption expenditure, S saving, I gross private domestic investment, G
944government expenditure on goods and services, and X - M net exports of goods and services.
945Then GDP equals
946A) C + S + G + X - M.
947B) C + S + G - X - M.
948C) C + I + G + X - M.
949D) C + I + G - X - M.
950Answer: C
951Topic: Expenditure Approach
952Skill: Conceptual
953Question history: Previous edition, Chapter 4
954AACSB: Reflective Thinking
95518) Consumption expenditure is the payment by households for consumption of
956A) goods but not services.
957B) services but not goods.
958C) goods and services.
959D) services and for saving.
960Answer: C
961Topic: Expenditure Approach, Consumption Expenditures
962Skill: Recognition
963Question history: Previous edition, Chapter 4
964AACSB: Reflective Thinking
96519) The largest component of GDP is
966A) gross private domestic investment.
967B) personal consumption expenditures.
968C) net exports of goods and services.
969D) government expenditure on goods and services.
970Answer: B
971Topic: Expenditure Approach, Consumption Expenditures
972Skill: Recognition
973Question history: Previous edition, Chapter 4
974AACSB: Reflective Thinking
975Copyright © 2012 Pearson Education, Inc.
976Chapter 4   Measuring GDP and Economic Growth   515
97720) Personal consumption expenditures include
978A) expenditures by households on goods and services produced only in the United States.
979B) expenditures by households on goods and services produced in the United States and the
980rest of the world.
981C) the purchase of new homes.
982D) the purchase of used goods and new goods.
983Answer: B
984Topic: Expenditure Approach, Consumption Expenditures
985Skill: Recognition
986Question history: Previous edition, Chapter 4
987AACSB: Reflective Thinking
98821) Which of the following purchases is included in personal consumption expenditures when
989determining gross domestic product?
990A) purchase of a new house because of the arrival of a new baby
991B) purchase of a new office building
992C) vacation expenses for a spring trip to Fort Lauderdale
993D) purchases of jeans to add to a storeʹs inventory
994Answer: C
995Topic: Expenditure Approach, Consumption Expenditures
996Skill: Conceptual
997Question history: Previous edition, Chapter 4
998AACSB: Reflective Thinking
99922) Personal consumption expenditures include all of the following EXCEPT spending on
1000A) consumer durable goods.
1001B) consumer nondurable goods.
1002C) consumer services.
1003D) new housing.
1004Answer: D
1005Topic: Expenditure Approach, Consumption Expenditures
1006Skill: Conceptual
1007Question history: Previous edition, Chapter 4
1008AACSB: Reflective Thinking
100923) All of the following household expenditures are included in consumption expenditure EXCEPT
1010A) payment to a dentist for filling a tooth.
1011B) purchase of corporate stock.
1012C) purchase of a new purse.
1013D) purchase of hair styling.
1014Answer: B
1015Topic: Expenditure Approach, Consumption Expenditures
1016Skill: Conceptual
1017Question history: Previous edition, Chapter 4
1018AACSB: Reflective Thinking
1019Copyright © 2012 Pearson Education, Inc.
1020516   Parkin · Macroeconomics, Tenth Edition
102124) Gross private domestic investment is all purchases of newly produced business capital goods
1022and buildings
1023A) minus the change in business inventories.
1024B) plus the change in business inventories plus residential construction.
1025C) plus fixed investment minus inventory investment.
1026D) plus purchases of capital goods produced in previous years to replace any depreciated
1027capital goods.
1028Answer: B
1029Topic: Expenditure Approach, Investment
1030Skill: Recognition
1031Question history: Previous edition, Chapter 4
1032AACSB: Reflective Thinking
103325) The difference between gross investment and net investment is
1034A) inflation.
1035B) depreciation.
1036C) initial capital.
1037D) consumption.
1038Answer: B
1039Topic: Expenditure Approach, Investment
1040Skill: Recognition
1041Question history: Previous edition, Chapter 4
1042AACSB: Reflective Thinking
104326) Goods that are produced this year, stored in inventories, and then sold to consumers next year
1044A) count in this yearʹs GDP.
1045B) count in next yearʹs GDP.
1046C) count in both this yearʹs and next yearʹs GDP.
1047D) are not counted as a part of GDP.
1048Answer: A
1049Topic: Expenditure Approach, Investment
1050Skill: Recognition
1051Question history: Previous edition, Chapter 4
1052AACSB: Reflective Thinking
105327) A new 2010 Honda Civic produced in 2010 and purchased in 2011 is
1054A) part of GDP in 2010.
1055B) part of GDP in 2011.
1056C) not part of GDP in either year because it was produced in one year and sold in another
1057year.
1058D) part of GDP in both 2010 and 2011.
1059Answer: A
1060Topic: Expenditure Approach, Consumption Expenditures
1061Skill: Recognition
1062Question history: New 10th edition
1063AACSB: Reflective Thinking
1064Copyright © 2012 Pearson Education, Inc.
1065Chapter 4   Measuring GDP and Economic Growth   517
106628) Which of the following are examples of the gross private domestic investment component of
1067GDP?
1068I. the purchase of production machinery by IBM
1069II. an increase in the finished goods inventory at Intel
1070A) I only
1071B) II only
1072C) both I and II
1073D) neither I nor II
1074Answer: C
1075Topic: Expenditure Approach, Investment
1076Skill: Conceptual
1077Question history: Previous edition, Chapter 4
1078AACSB: Reflective Thinking
107929) In the calculation of gross domestic product by the expenditure approach, the ʺinvestmentʺ
1080component is
1081A) net investment.
1082B) gross investment minus depreciation.
1083C) gross investment plus depreciation.
1084D) gross investment.
1085Answer: D
1086Topic: Expenditure Approach, Investment
1087Skill: Conceptual
1088Question history: Previous edition, Chapter 4
1089AACSB: Reflective Thinking
109030) An example of ʺinvestmentʺ in computing real GDP using the expenditure approach is the
1091purchase of
1092A) a new set of tools by an auto mechanic, for use in repairing cars.
1093B) 100 shares of IBM stock.
1094C) a 100 year old house by a married couple.
1095D) computer chips by Dell to put in their personal computers.
1096Answer: A
1097Topic: Expenditure Approach, Investment
1098Skill: Conceptual
1099Question history: Previous edition, Chapter 4
1100AACSB: Reflective Thinking
110131) An example of ʺinvestmentʺ in the national income accounts is the purchase of
1102A) a new van by a potter, who packs it with his wares and travels to art shows.
1103B) 100 shares of Canadian stock on the New York Stock Exchange.
1104C) a 100-year-old house that was just put on the protected historic sites list in the year in
1105question.
1106D) a U.S. government bond.
1107Answer: A
1108Topic: Expenditure Approach, Investment
1109Skill: Conceptual
1110Question history: Previous edition, Chapter 4
1111AACSB: Reflective Thinking
1112Copyright © 2012 Pearson Education, Inc.
1113518   Parkin · Macroeconomics, Tenth Edition
111432) In the national income accounts, the purchase of a new house counts as
1115A) consumption expenditure.
1116B) investment.
1117C) a transfer.
1118D) an addition to inventory.
1119Answer: B
1120Topic: Expenditure Approach, Investment
1121Skill: Conceptual
1122Question history: Previous edition, Chapter 4
1123AACSB: Reflective Thinking
112433) All of the following are included in gross private domestic investment expenditure EXCEPT a
1125A) businessʹs purchase of a fleet of cars.
1126B) householdʹs purchase of a new house.
1127C) businessʹs purchase of another companyʹs stock.
1128D) a retail storeʹs purchase of shoes to add to its inventory.
1129Answer: C
1130Topic: Expenditure Approach, Investment
1131Skill: Conceptual
1132Question history: Previous edition, Chapter 4
1133AACSB: Reflective Thinking
113434) In the national income accounts, government expenditure on goods and services refer to those
1135purchases made by
1136A) federal and state governments only.
1137B) the federal government only.
1138C) state and local governments only.
1139D) all levels of government.
1140Answer: D
1141Topic: Expenditure Approach, Government Expenditure
1142Skill: Recognition
1143Question history: Previous edition, Chapter 4
1144AACSB: Reflective Thinking
114535) In the national income accounts, government expenditure on goods and services exclude
1146A) transfer payments.
1147B) state and local government purchases.
1148C) local government purchases but include state government purchases.
1149D) spending on national defense.
1150Answer: A
1151Topic: Expenditure Approach, Government Expenditure
1152Skill: Recognition
1153Question history: Previous edition, Chapter 4
1154AACSB: Reflective Thinking
1155Copyright © 2012 Pearson Education, Inc.
1156Chapter 4   Measuring GDP and Economic Growth   519
115736) Which of the following is included in the government expenditure component of the
1158expenditure approach to GDP?
1159A) state government expenditure on local schools
1160B) transfer payments
1161C) changes in inventories
1162D) taxes
1163Answer: A
1164Topic: The Expenditure Approach, Government Purchases
1165Skill: Recognition
1166Question history: Previous edition, Chapter 4
1167AACSB: Reflective Thinking
116837) Which one of the following transactions in a particular year is included in gross domestic
1169product for that year?
1170A) Social Security payments to retirees
1171B) The government pays a computer services company that assisted in the delivery of Social
1172Security payments to retirees.
1173C) A car is produced in the previous year and remains in inventory for the entire year under
1174consideration.
1175D) A stay-at-home parent performs housework that the family would otherwise have paid a
1176maid $20,000 a year to perform.
1177Answer: B
1178Topic: The Expenditure Approach, Government Purchases
1179Skill: Recognition
1180Question history: Previous edition, Chapter 4
1181AACSB: Reflective Thinking
118238) Which of the following is included in government expenditures when measuring GDP?
1183A) Social Security payments
1184B) unemployment compensation payments
1185C) pension payment made to past presidents
1186D) the current presidentʹs salary
1187Answer: D
1188Topic: Expenditure Approach, Government Expenditure
1189Skill: Conceptual
1190Question history: Previous edition, Chapter 4
1191AACSB: Reflective Thinking
119239) Transfer payments
1193A) are included in the government expenditure category in gross domestic product.
1194B) refer to all payments made to households by governments.
1195C) refer to payments made by the government that are not made to purchase a good or
1196service.
1197D) are made by households to firms in exchange for goods and services.
1198Answer: C
1199Topic: Expenditure Approach, Government Expenditure
1200Skill: Recognition
1201Question history: Previous edition, Chapter 4
1202AACSB: Reflective Thinking
1203Copyright © 2012 Pearson Education, Inc.
1204520   Parkin · Macroeconomics, Tenth Edition
120540) In the computation of GDP, social security payments count as
1206A) transfer payments and are included in GDP.
1207B) transfer payments and are not included in GDP.
1208C) government expenditure on goods and services and are included in GDP.
1209D) government expenditure on goods and services and are not included in GDP.
1210Answer: B
1211Topic: The Expenditure Approach, Government Purchases
1212Skill: Recognition
1213Question history: Previous edition, Chapter 4
1214AACSB: Reflective Thinking
121541) Which of the following items is NOT part of government expenditure on goods and services in
1216the GDP accounts?
1217A) gasoline purchases for government car pools
1218B) Social Security expenditures
1219C) new computer hardware for use by the IRS
1220D) drapes to brighten up the presidentʹs office
1221Answer: B
1222Topic: Expenditure Approach, Government Expenditure
1223Skill: Conceptual
1224Question history: Previous edition, Chapter 4
1225AACSB: Reflective Thinking
122642) Transfer payments are not included in GDP because
1227A) their market value cannot be accurately determined.
1228B) they do not generate additional income.
1229C) they are not purchases of goods or services.
1230D) their value is included in government expenditure.
1231Answer: C
1232Topic: Expenditure Approach, Government Expenditure
1233Skill: Conceptual
1234Question history: Previous edition, Chapter 4
1235AACSB: Reflective Thinking
123643) Which of the following transfer payments is included in GDP?
1237A) Social Security payments
1238B) welfare payments
1239C) veteranʹs benefits
1240D) none of the above
1241Answer: D
1242Topic: Expenditure Approach, Government Expenditure
1243Skill: Conceptual
1244Question history: Previous edition, Chapter 4
1245AACSB: Reflective Thinking
1246Copyright © 2012 Pearson Education, Inc.
1247Chapter 4   Measuring GDP and Economic Growth   521
124844) Which of the following is NOT part of GDP calculated using the expenditure approach?
1249A) General Motorsʹ purchases of new capital equipment
1250B) expenditures by the federal government for national defense
1251C) social security payments made to the elderly
1252D) the purchase of new homes by consumers
1253Answer: C
1254Topic: The Expenditure Approach, Government Purchases
1255Skill: Conceptual
1256Question history: Previous edition, Chapter 4
1257AACSB: Reflective Thinking
125845) Transfer payments are not part of government expenditure on goods and services because
1259transfer payments
1260A) are not predictable given the nature of their appropriation and allocation.
1261B) do not represent the purchase of a final good or service.
1262C) are not always spent on goods produced in the U.S.
1263D) The premise of the question is incorrect because transfer payments are part of government
1264purchases of goods and services.
1265Answer: B
1266Topic: Expenditure Approach, Government Expenditure
1267Skill: Conceptual
1268Question history: Previous edition, Chapter 4
1269AACSB: Reflective Thinking
127046) Government expenditures included in the expenditure approach to GDP include ________.
1271A) social security and education
1272B) net exports
1273C) buying a new bomber
1274D) Both answers A and C are correct
1275Answer: C
1276Topic: Expenditure Approach, Government Expenditure
1277Skill: Conceptual
1278Question history: Previous edition, Chapter 4
1279AACSB: Reflective Thinking
128047) Net exports of goods and services equal the
1281A) exports of goods and services divided by the imports of goods and services.
1282B) exports of goods and services plus the imports of goods and services.
1283C) exports of goods and services minus the imports of goods and services.
1284D) imports of goods and services minus the exports of goods and services.
1285Answer: C
1286Topic: Expenditure Approach, Net Exports
1287Skill: Recognition
1288Question history: Previous edition, Chapter 4
1289AACSB: Reflective Thinking
1290Copyright © 2012 Pearson Education, Inc.
1291522   Parkin · Macroeconomics, Tenth Edition
129248) Net exports is negative if
1293A) the value of exports exceeds the value of imports.
1294B) the value of imports exceeds the value of exports.
1295C) the tariff payments are included in the value of imported and exported items.
1296D) too much production occurs in the exporting country during the year.
1297Answer: B
1298Topic: Expenditure Approach, Net Exports
1299Skill: Recognition
1300Question history: Previous edition, Chapter 4
1301AACSB: Reflective Thinking
130249) In 2010, net exports in the United States were
1303A) zero.
1304B) positive.
1305C) negative.
1306D) greater than personal consumption expenditures.
1307Answer: C
1308Topic: Expenditure Approach, Net Exports
1309Skill: Recognition
1310Question history: Modified 10th edition
1311AACSB: Reflective Thinking
131250) To calculate GDP using the expenditure approach, in part it is necessary to
1313A) add imports and exports.
1314B) add imports and subtract exports.
1315C) add exports and subtract imports.
1316D) subtract both exports and imports.
1317Answer: C
1318Topic: Expenditure Approach, Net Exports
1319Skill: Recognition
1320Question history: Previous edition, Chapter 4
1321AACSB: Reflective Thinking
132251) An increase in exports of goods or services with no change in imports of goods or services
1323A) decreases GDP.
1324B) increases GDP.
1325C) may increase or decrease GDP depending on whether it is the export of goods or the
1326export of services that increased.
1327D) has no effect on GDP.
1328Answer: B
1329Topic: Expenditure Approach, Net Exports
1330Skill: Conceptual
1331Question history: Previous edition, Chapter 4
1332AACSB: Reflective Thinking
1333Copyright © 2012 Pearson Education, Inc.
1334Chapter 4   Measuring GDP and Economic Growth   523
133552) By itself, an increase in exports
1336A) increases GDP.
1337B) decreases GDP.
1338C) means imports decrease by the same amount.
1339D) can either increase or decrease GDP, depending on whether the exports are durable or
1340nondurable.
1341Answer: A
1342Topic: Expenditure Approach, Net Exports
1343Skill: Conceptual
1344Question history: Previous edition, Chapter 4
1345AACSB: Reflective Thinking
134653) If Ford sells 200 Explorers for a total of $400,000 to Germany, while the United States imports
1347100 BMWs for a total of $500,000 from Germany,
1348A) U.S. GDP increases because it sells more Explorers.
1349B) U.S. GDP decreases because net exports are negative.
1350C) Germanyʹs GDP decreases.
1351D) U.S. net exports is positive.
1352Answer: B
1353Topic: Expenditure Approach, Net Exports
1354Skill: Conceptual
1355Question history: Previous edition, Chapter 4
1356AACSB: Reflective Thinking
135754) An U.S. firm buys a new industrial sewing machine from a company located in France. Which
1358of the following is true?
1359I. U.S. net exports decrease.
1360II. U.S. investment increases.
1361A) only I
1362B) only II
1363C) both I and II
1364D) neither I nor II
1365Answer: C
1366Topic: The Expenditure Approach, Net Exports
1367Skill: Conceptual
1368Question history: Previous edition, Chapter 4
1369AACSB: Reflective Thinking
137055) If an American firm produces goods that are sold to a German household, then
1371A) German GDP increases but not U.S. GDP.
1372B) U.S. GDP increases.
1373C) the transaction is considered an export in the German GDP accounts.
1374D) net exports in the United States will not change because an export immediately generates
1375an offsetting import.
1376Answer: B
1377Topic: Expenditure Approach, Net Exports
1378Skill: Conceptual
1379Question history: Previous edition, Chapter 4
1380AACSB: Reflective Thinking
1381Copyright © 2012 Pearson Education, Inc.
1382524   Parkin · Macroeconomics, Tenth Edition
138356) In the calculation of GDP by the expenditure approach, exports from the United States must be
1384A) subtracted because they are included in the consumption of a foreign country.
1385B) ignored because they are not bought by U.S. citizens.
1386C) subtracted if they are bought by foreign firms for investment purposes.
1387D) added.
1388Answer: D
1389Topic: Expenditure Approach, Net Exports
1390Skill: Conceptual
1391Question history: Previous edition, Chapter 4
1392AACSB: Reflective Thinking
1393Item Millions of
1394dollars
1395Personal consumption expenditure 80
1396Government expenditure on goods
1397and services 30
1398Net taxes 35
1399Gross private domestic investment 20
1400Imports of goods and services 10
1401Exports of goods and services 20
140257) Using the information in the table above, calculate the value of GDP.
1403A) $185 million
1404B) $145 million
1405C) $195 million
1406D) $140 million
1407Answer: D
1408Topic: Expenditure Approach
1409Skill: Analytical
1410Question history: Previous edition, Chapter 4
1411AACSB: Analytical Skills
141258) Use the information in the table above to calculate the value of net exports.
1413A) $10 million
1414B) $0
1415C) -$10 million
1416D) $30 million
1417Answer: A
1418Topic: Expenditure Approach, Net Exports
1419Skill: Analytical
1420Question history: Previous edition, Chapter 4
1421AACSB: Analytical Skills
1422Copyright © 2012 Pearson Education, Inc.
1423Chapter 4   Measuring GDP and Economic Growth   525
142459) Last year in the country of Nerf imports equaled exports. Nerfʹs GDP was $500 million, its
1425consumer expenditure was $380 million, and its investment was $20 million. Nerfʹs government
1426expenditure on goods and services were ________.
1427A) $100 million
1428B) $900 million
1429C) $500 million
1430D) zero
1431Answer: A
1432Topic: Expenditure Approach
1433Skill: Analytical
1434Question history: Modified 10th edition
1435AACSB: Analytical Skills
1436Item Billions of dollars
1437Government expenditure on
1438goods and services 250
1439Compensation of employees 1,675
1440Gross private domestic
1441investment 325
1442Rental income 20
1443Personal consumption
1444expenditures 1425
1445Net interest 40
1446Net exports of goods and
1447services 100
1448Indirect business taxes and
1449depreciation 300
145060) The above table shows some (but not all) national income accounting data for a hypothetical
1451country. According to these data, the value of GDP is ________ billion.
1452A) $2100
1453B) $1850
1454C) $2000
1455D) $2050
1456Answer: A
1457Topic: Expenditure Approach
1458Skill: Analytical
1459Question history: Previous edition, Chapter 4
1460AACSB: Analytical Skills
1461Copyright © 2012 Pearson Education, Inc.
1462526   Parkin · Macroeconomics, Tenth Edition
1463Item Dollars
1464Personal consumption
1465expenditure 1500
1466Gross private domestic
1467investment 355
1468Government expenditure
1469on goods and services 590
1470Exports of goods and
1471services 70
1472Imports of goods and
1473services 50
1474Depreciation 200
1475Indirect business taxes 75
147661) Based on the data in the above table, gross domestic product equals
1477A) $2,190.
1478B) $2,840.
1479C) $2,465.
1480D) $2,750.
1481Answer: C
1482Topic: Expenditure Approach
1483Skill: Analytical
1484Question history: Previous edition, Chapter 4
1485AACSB: Analytical Skills
1486Item Billions of dollars
1487Personal consumption
1488expenditure 100
1489Gross private domestic
1490investment 10
1491Government expenditure on
1492goods and services 50
1493Exports of goods and services 30
1494Imports of goods and services 30
1495Net taxes 50
149662) The above table shows data from the GDP accounts of Hypothetica. Hypotheticaʹs GDP is
1497________ billion.
1498A) $270
1499B) $210
1500C) $190
1501D) $160
1502Answer: D
1503Topic: Expenditure Approach
1504Skill: Analytical
1505Question history: Previous edition, Chapter 4
1506AACSB: Analytical Skills
1507Copyright © 2012 Pearson Education, Inc.
1508Chapter 4   Measuring GDP and Economic Growth   527
150963) If imports are $100 million less than exports, government expenditures are $500 million,
1510consumer expenditures are $1 billion, and gross investment spending is $500 million, then GDP
1511is
1512A) $1 billion.
1513B) $1.9 billion.
1514C) $2 billion.
1515D) $2.1 billion.
1516Answer: D
1517Topic: Expenditure Approach
1518Skill: Analytical
1519Question history: Previous edition, Chapter 4
1520AACSB: Analytical Skills
152164) If consumption expenditures are $500 million, net investment is $100 million, depreciation
1522equals $5 million, imports are $50 million, exports are $55 million, government expenditure on
1523goods and services is $220 million, and government transfer payments are $20 million, then
1524GDP is
1525A) $790 million.
1526B) $800 million.
1527C) $830 million.
1528D) $850 million.
1529Answer: C
1530Topic: Expenditure Approach
1531Skill: Analytical
1532Question history: Previous edition, Chapter 4
1533AACSB: Analytical Skills
1534Component Amount
1535(billions of dollars)
1536Net taxes 1,635
1537Personal consumption
1538expenditure 5,566
1539Depreciation 622
1540Government expenditure 1,784
1541Gross investment 1,234
1542Exports 957
1543Imports 1,138
1544Household saving 1,202
154565) Using the data in the table above, what is the value of GDP?
1546A) $13,516 billion
1547B) $10,679 billion
1548C) $9,541 billion
1549D) $8,403 billion
1550Answer: D
1551Topic: Expenditure Approach
1552Skill: Analytical
1553Question history: Previous edition, Chapter 4
1554AACSB: Analytical Skills
1555Copyright © 2012 Pearson Education, Inc.
1556528   Parkin · Macroeconomics, Tenth Edition
155766) Using the data in the above table, what is the value of net exports?
1558A) -$181 billion
1559B) $181 billion
1560C) $957 billion
1561D) -$957 billion
1562Answer: A
1563Topic: Expenditure Approach
1564Skill: Analytical
1565Question history: Previous edition, Chapter 4
1566AACSB: Analytical Skills
156767) Using the data in the above table, what is the value of national saving?
1568A) $1,202 billion
1569B) $2,837 billion
1570C) $1,053 billion
1571D) -$85 billion
1572Answer: C
1573Topic: National Saving
1574Skill: Analytical
1575Question history: Previous edition, Chapter 4
1576AACSB: Analytical Skills
1577Component Amount
1578(dollars)
1579Net taxes 10
1580Personal consumption
1581expenditure 50
1582Depreciation 8
1583Government expenditure 20
1584Gross investment 26
1585Net exports -10
1586Compensation of
1587employees 65
158868) Using the information in the table above, calculate gross domestic product.
1589A) $118
1590B) $108
1591C) $86
1592D) $78
1593Answer: C
1594Topic: Expenditure Approach
1595Skill: Analytical
1596Question history: Previous edition, Chapter 4
1597AACSB: Analytical Skills
1598Copyright © 2012 Pearson Education, Inc.
1599Chapter 4   Measuring GDP and Economic Growth   529
160069) Using the information in the table above, calculate the governmentʹs budget deficit or surplus.
1601A) $2
1602B) -$4
1603C) -$10
1604D) $4
1605Answer: C
1606Topic: Expenditure Approach
1607Skill: Analytical
1608Question history: Previous edition, Chapter 4
1609AACSB: Analytical Skills
1610Component
1611Amount
1612(billions of
1613dollars)
1614Personal consumption
1615expenditure 3,720
1616Government
1617expenditure   430
1618Gross investment   610
1619Net investment   520
1620Exports   650
1621Imports   720
162270) Using the information in the table above, calculate gross domestic product.
1623A) $5,130 billion
1624B) $5,320 billion
1625C) $4,760 billion
1626D) $4,690 billion
1627Answer: D
1628Topic: Expenditure Approach
1629Skill: Analytical
1630Question history: Previous edition, Chapter 4
1631AACSB: Analytical Skills
163271) Using the information in the table above, net exports equals
1633A) $1,370 billion.
1634B) $650 billion.
1635C) $20 billion.
1636D) -$70 billion.
1637Answer: D
1638Topic: Net Exports
1639Skill: Analytical
1640Question history: Previous edition, Chapter 4
1641AACSB: Analytical Skills
1642Copyright © 2012 Pearson Education, Inc.
1643530   Parkin · Macroeconomics, Tenth Edition
164472) Using the information in the table above, depreciation equals
1645A) -$90 billion.
1646B) $90 billion.
1647C) -$70 billion.
1648D) some amount that cannot be determined.
1649Answer: B
1650Topic: Depreciation
1651Skill: Analytical
1652Question history: Previous edition, Chapter 4
1653AACSB: Analytical Skills
1654Government purchases of goods and services $240
1655Depreciation 240
1656Gross private domestic investment 400
1657Personal income taxes 140
1658Net taxes 120
1659Net exports of goods and services 80
1660Personal consumption expenditures 640
1661Net interest 100
166273) From the data in the above table, GDP equals
1663A) $1,120.
1664B) $1,280.
1665C) $1,290.
1666D) $1,360.
1667Answer: D
1668Topic: Expenditure Approach
1669Skill: Analytical
1670Question history: Previous edition, Chapter 4
1671AACSB: Analytical Skills
167274) The approach to GDP that sums compensation of employees, rental income, corporate profits,
1673net interest, proprietorsʹ income, depreciation, and indirect taxes and subtracts subsidies is the
1674A) opportunity cost approach.
1675B) expenditure approach.
1676C) added cost approach.
1677D) income approach.
1678Answer: D
1679Topic: Income Approach
1680Skill: Recognition
1681Question history: Previous edition, Chapter 4
1682AACSB: Reflective Thinking
1683Copyright © 2012 Pearson Education, Inc.
1684Chapter 4   Measuring GDP and Economic Growth   531
168575) The income approach to measuring GDP sums together
1686A) compensation of employees, rental income, corporate profits, net interest, proprietorsʹ
1687income, subsidies paid by the government, indirect taxes paid, and depreciation.
1688B) compensation of employees, rental income, corporate profits, net interest, proprietorsʹ
1689income, indirect taxes paid, and depreciation and subtracts subsidies paid by the
1690government.
1691C) the sales of each firm in the economy.
1692D) the costs of each firm in the economy and then subtracts indirect business taxes and
1693depreciation.
1694Answer: B
1695Topic: Income Approach
1696Skill: Recognition
1697Question history: Previous edition, Chapter 4
1698AACSB: Reflective Thinking
169976) Proprietorsʹ income is a component of which approach to measuring GDP?
1700A) incomes approach
1701B) expenditure approach
1702C) cost approach
1703D) output approach
1704Answer: A
1705Topic: Income Approach
1706Skill: Recognition
1707Question history: Previous edition, Chapter 4
1708AACSB: Reflective Thinking
170977) The income approach to measuring GDP
1710A) determines the cost of production, then adjusts it to equal the market value of production.
1711B) sums all incomes earned in the United States and makes no other adjustments because
1712other adjustments are not necessary.
1713C) measures the cost of producing GDP rather than the market value.
1714D) sums the value at each stage of production plus the value of depreciation.
1715Answer: A
1716Topic: Income Approach
1717Skill: Recognition
1718Question history: Previous edition, Chapter 4
1719AACSB: Reflective Thinking
172078) The five categories of income used in the income approach to the measurement of GDP are
1721A) consumption, saving, rental income, corporate profits, and investment.
1722B) employee compensation, net interest, rental income, corporate profits, and proprietorʹs
1723income.
1724C) employee compensation, consumption, rental income, corporate profits, and proprietorʹs
1725income.
1726D) employee compensation, saving, rental income, corporate profits, and investment.
1727Answer: B
1728Topic: Income Approach
1729Skill: Recognition
1730Question history: Previous edition, Chapter 4
1731AACSB: Reflective Thinking
1732Copyright © 2012 Pearson Education, Inc.
1733532   Parkin · Macroeconomics, Tenth Edition
173479) Which of the following expressions equals GDP?
1735A) compensation of employees + consumption + depreciation + net investment
1736B) compensation of employees + net interest + rental income + depreciation + corporate
1737profits + proprietorsʹ income + indirect taxes - subsidies
1738C) compensation of employees + net exports + depreciation + corporate profits
1739D) compensation of employees + gross investment + rental income + depreciation + corporate
1740profits + indirect taxes - subsidies
1741Answer: B
1742Topic: Income Approach
1743Skill: Recognition
1744Question history: Previous edition, Chapter 4
1745AACSB: Reflective Thinking
174680) Which of the following is a component of the incomes approach to GDP?
1747A) consumption expenditure
1748B) wages and salaries
1749C) investment
1750D) government expenditure on goods and services
1751Answer: B
1752Topic: Income Approach
1753Skill: Recognition
1754Question history: Previous edition, Chapter 4
1755AACSB: Reflective Thinking
175681) The income approach measures GDP by adding together compensation of employees,
1757proprietorsʹ income, ________.
1758A) net investment, saving, and farmersʹ income
1759B) net interest, rental income, and corporate profits
1760C) net investment, rental income, and corporate profits
1761D) net saving, investment income, and profits
1762Answer: B
1763Topic: Income Approach
1764Skill: Recognition
1765Question history: Previous edition, Chapter 4
1766AACSB: Reflective Thinking
176782) Which of the following items is NOT a component of the income approach to measuring U.S.
1768GDP?
1769A) interest earned on savings deposits
1770B) profits made by businesses
1771C) income earned by businesses that export goods
1772D) investment
1773Answer: D
1774Topic: Income Approach
1775Skill: Recognition
1776Question history: Previous edition, Chapter 4
1777AACSB: Reflective Thinking
1778Copyright © 2012 Pearson Education, Inc.
1779Chapter 4   Measuring GDP and Economic Growth   533
178083) Which of the following is NOT a part of the income approach to determining GDP?
1781A) rental income
1782B) gross private domestic investment
1783C) net interest
1784D) indirect business taxes
1785Answer: B
1786Topic: Income Approach
1787Skill: Recognition
1788Question history: Previous edition, Chapter 4
1789AACSB: Reflective Thinking
179084) Which of the following is NOT one of the components for computing GDP based upon the
1791income approach?
1792A) investment
1793B) corporate profits
1794C) compensation of employees
1795D) net interest
1796Answer: A
1797Topic: Income Approach
1798Skill: Recognition
1799Question history: Previous edition, Chapter 4
1800AACSB: Reflective Thinking
180185) Which of the following is NOT included in the income approach to measuring GDP?
1802A) net interest
1803B) net exports
1804C) corporate profits
1805D) compensation of employees
1806Answer: B
1807Topic: Income Approach
1808Skill: Recognition
1809Question history: Previous edition, Chapter 4
1810AACSB: Reflective Thinking
181186) In the country of Darrowby, net domestic income at factor cost is $2.0 million. Gross domestic
1812product is $3.0 million, and depreciation is $0.5 million. Indirect taxes less subsidies ________.
1813A) are $1 million
1814B) are $0.5 million
1815C) cannot be calculated
1816D) are -$0.5 million
1817Answer: B
1818Topic: Income Approach
1819Skill: Analytical
1820Question history: Previous edition, Chapter 4
1821AACSB: Analytical Skills
1822Copyright © 2012 Pearson Education, Inc.
1823534   Parkin · Macroeconomics, Tenth Edition
1824Item Billions of
1825dollars
1826Compensation of employees 80
1827Net interest and rental income 30
1828Corporate profits 10
1829Proprietorʹs income 20
183087) Use the information in the table above plus the fact that indirect taxes less subsidies are $10
1831billion and depreciation is $30 billion to calculate the value of GDP.
1832A) $180 billion
1833B) $150 billion
1834C) $140 billion
1835D) $130 billion
1836Answer: A
1837Topic: Income Approach
1838Skill: Analytical
1839Question history: Previous edition, Chapter 4
1840AACSB: Analytical Skills
184188) The largest component of national income is
1842A) compensation of employees.
1843B) rental income.
1844C) corporate profits.
1845D) proprietorsʹ income.
1846Answer: A
1847Topic: Income Approach, Compensation of Employees
1848Skill: Recognition
1849Question history: Previous edition, Chapter 4
1850AACSB: Reflective Thinking
185189) Looking at the components of the income approach we see that
1852A) compensation of employees is the largest category.
1853B) consumption is the largest category.
1854C) profits are the largest category.
1855D) rental income is the largest category.
1856Answer: A
1857Topic: Income Approach, Compensation of Employees
1858Skill: Recognition
1859Question history: Previous edition, Chapter 4
1860AACSB: Reflective Thinking
1861Copyright © 2012 Pearson Education, Inc.
1862Chapter 4   Measuring GDP and Economic Growth   535
186390) Compensation paid to employees represented ________ of GDP for the United States in 2010.
1864A) about 5 percent
1865B) approximately 15 percent
1866C) 35 percent
1867D) more than 50 percent
1868Answer: D
1869Topic: Income Approach, Compensation of Employees
1870Skill: Recognition
1871Question history: Previous edition, Chapter 4
1872AACSB: Reflective Thinking
187391) Which of the following is included in ʺcompensation of employeesʺ part of the income approach
1874to measuring GDP?
1875I. Wages and salaries.
1876II. Pension fund contributions.
1877III. Social security contributions.
1878A) I only
1879B) I and II
1880C) I and III
1881D) I, II and III
1882Answer: D
1883Topic: Income Approach, Compensation of Employees
1884Skill: Recognition
1885Question history: Previous edition, Chapter 4
1886AACSB: Reflective Thinking
188792) When calculating the compensation of employees part of GDP,
1888A) social security contributions must be included.
1889B) fringe benefits are not included.
1890C) taxes withheld on earnings are not included.
1891D) the value of vacation time must be included.
1892Answer: A
1893Topic: Income Approach, Compensation of Employees
1894Skill: Recognition
1895Question history: Previous edition, Chapter 4
1896AACSB: Reflective Thinking
189793) In the national income accounts, net interest is the total interest payments received by
1898households on loans made by them minus
1899A) interest received from householdsʹ ownership of government bonds.
1900B) interest payments made by households on their own borrowing.
1901C) interest payments made by households to foreign lenders.
1902D) taxes paid by households on their interest income.
1903Answer: B
1904Topic: Income Approach, Net Interest
1905Skill: Recognition
1906Question history: Previous edition, Chapter 4
1907AACSB: Reflective Thinking
1908Copyright © 2012 Pearson Education, Inc.
1909536   Parkin · Macroeconomics, Tenth Edition
191094) Rental income includes
1911A) the payment for the use of land.
1912B) the payment for the use of all rented inputs.
1913C) no income from rental housing because most houses are occupied by their owners.
1914D) Both answers A and B are correct.
1915Answer: D
1916Topic: Income Approach, Rental Income
1917Skill: Recognition
1918Question history: Previous edition, Chapter 4
1919AACSB: Reflective Thinking
192095) Which of the following is included in the category of corporate profits when measuring GDP?
1921I. Profits paid as dividends.
1922II. Undistributed profits.
1923III. Income received by owners and operators of businesses.
1924A) I only
1925B) I and II
1926C) I and III
1927D) I, II and III
1928Answer: B
1929Topic: Income Approach, Corporate Profits
1930Skill: Recognition
1931Question history: Previous edition, Chapter 4
1932AACSB: Reflective Thinking
193396) An indirect tax is a tax paid by consumers
1934A) to a state or local government.
1935B) when they purchase goods and services.
1936C) on unearned income (as opposed to wages and salaries).
1937D) that is a percentage of the value of their real property.
1938Answer: B
1939Topic: Indirect Tax
1940Skill: Recognition
1941Question history: Previous edition, Chapter 4
1942AACSB: Reflective Thinking
194397) An indirect tax is exemplified by
1944A) an income tax.
1945B) a sales tax.
1946C) a subsidy.
1947D) None of the above answers is correct.
1948Answer: B
1949Topic: Indirect Tax
1950Skill: Conceptual
1951Question history: Previous edition, Chapter 4
1952AACSB: Reflective Thinking
1953Copyright © 2012 Pearson Education, Inc.
1954Chapter 4   Measuring GDP and Economic Growth   537
195598) Which of the following best represents an indirect tax?
1956A) federal income tax
1957B) state income tax
1958C) local property tax
1959D) sales taxes paid on goods and services
1960Answer: D
1961Topic: Indirect Tax
1962Skill: Conceptual
1963Question history: New 10th edition
1964AACSB: Reflective Thinking
196599) The presence of ________ creates a difference in the value between the market price and the
1966factor cost of a product.
1967A) indirect taxes and consumption
1968B) subsidies and direct taxes
1969C) corporate profits and subsidies
1970D) indirect taxes and subsidies
1971Answer: D
1972Topic: Indirect Tax
1973Skill: Conceptual
1974Question history: Previous edition, Chapter 4
1975AACSB: Reflective Thinking
1976100) The sum of compensation to employees, rental income, corporate profits, net interest, and
1977proprietorsʹ income is
1978A) gross domestic product.
1979B) gross domestic income.
1980C) net domestic income at factor cost.
1981D) net domestic product.
1982Answer: C
1983Topic: Net Domestic Income at Factor Cost
1984Skill: Recognition
1985Question history: Previous edition, Chapter 4
1986AACSB: Reflective Thinking
1987101) Two reasons why valuing goods at their market prices is different than valuing them at their
1988factor costs include
1989A) depreciation and investment.
1990B) exports and imports.
1991C) personal taxes and corporate taxes.
1992D) indirect taxes and subsidies.
1993Answer: D
1994Topic: Net Domestic Income at Factor Cost
1995Skill: Conceptual
1996Question history: Previous edition, Chapter 4
1997AACSB: Reflective Thinking
1998Copyright © 2012 Pearson Education, Inc.
1999538   Parkin · Macroeconomics, Tenth Edition
2000Corporate profits $200
2001Net interest 150
2002Indirect taxes less subsidies 230
2003Depreciation 250
2004Compensation of employees 1,350
2005Proprietorʹs income 150
2006Rental income 70
2007Personal consumption expenditures 1,400
2008Government expenditure on goods
2009and services 500
2010Net exports of goods and services 40
2011102) Using the data in the table above, gross domestic product equals
2012A) $1,920.
2013B) $1,940.
2014C) $2,150.
2015D) $2,400.
2016Answer: D
2017Topic: Income Approach
2018Skill: Analytical
2019Question history: Previous edition, Chapter 4
2020AACSB: Analytical Skills
2021103) Using the data in the above table, gross private domestic investment equals
2022A) $250.
2023B) $260.
2024C) $460.
2025D) some amount that cannot be determined without more information.
2026Answer: C
2027Topic: Expenditure Approach
2028Skill: Analytical
2029Question history: Previous edition, Chapter 4
2030AACSB: Analytical Skills
2031104) Using the data in the above table, net private domestic investment equals
2032A) $210.
2033B) $260.
2034C) $510.
2035D) some amount that cannot be determined without more information.
2036Answer: A
2037Topic: Expenditure Approach
2038Skill: Analytical
2039Question history: Previous edition, Chapter 4
2040AACSB: Analytical Skills
2041Copyright © 2012 Pearson Education, Inc.
2042Chapter 4   Measuring GDP and Economic Growth   539
2043Item Billions of
2044dollars
2045Personal income 1,200
2046Net domestic income at
2047factor cost 2,100
2048Government expenditure
2049on goods and services 400
2050Depreciation 200
2051Gross private domestic
2052investment 100
2053Indirect taxes 600
2054Subsidies 100
2055105) The above table shows some national income accounting data for a nation. In this nation, gross
2056domestic product is equal to ________ billion.
2057A) $2,000
2058B) $2,300
2059C) $2,500
2060D) $2,800
2061Answer: D
2062Topic: Income Approach
2063Skill: Analytical
2064Question history: Previous edition, Chapter 4
2065AACSB: Analytical Skills
2066Copyright © 2012 Pearson Education, Inc.
2067540   Parkin · Macroeconomics, Tenth Edition
2068Item Dollars
2069Net interest 239
2070Government expenditure
2071on goods and services 136
2072Compensation of
2073employees 1,735
2074Rental income 37
2075Proprietorsʹ income 128
2076Indirect taxes minus
2077subsidies 259
2078Corporate profits 194
2079Exports of goods and
2080services 249
2081Imports of goods and
2082services 289
2083Depreciation 333
2084106) Using the data in the above table, gross domestic product as calculated by the income approach
2085equals ________.
2086A) $2,333
2087B) $2,592
2088C) $2,925
2089D) $2,205
2090Answer: C
2091Topic: Income Approach
2092Skill: Analytical
2093Question history: Previous edition, Chapter 4
2094AACSB: Analytical Skills
2095Copyright © 2012 Pearson Education, Inc.
2096Chapter 4   Measuring GDP and Economic Growth   541
2097Component
2098Amount
2099(billions of
2100dollars)
2101Gross investment 1300
2102Personal consumption
2103expenditure 1475
2104Depreciation 25
2105Government expenditure on
2106goods and services 1315
2107U.S. imports 260
2108U.S. exports 249
2109Compensation of employees 65
2110107) The above table gives data for a hypothetical nation. Gross domestic product is
2111A) $4,049 billion.
2112B) $4,079 billion.
2113C) $4,054 billion.
2114D) $4,339 billion.
2115Answer: B
2116Topic: Expenditure Approach
2117Skill: Analytical
2118Question history: Previous edition, Chapter 4
2119AACSB: Analytical Skills
2120108) Nominal GDP is
2121A) real GDP adjusted for price changes.
2122B) GDP valued at prices of that year.
2123C) GDP valued at constant prices.
2124D) real GDP valued at base year prices.
2125Answer: B
2126Topic: Nominal GDP
2127Skill: Recognition
2128Question history: Previous edition, Chapter 4
2129AACSB: Reflective Thinking
2130109) Nominal GDP is the value of final goods and services
2131A) at the prices of that year.
2132B) at the prices of the immediately previous year.
2133C) at the prices of a base year.
2134D) produced in foreign countries but consumed in the domestic country.
2135Answer: A
2136Topic: Nominal GDP
2137Skill: Recognition
2138Question history: New 10th edition
2139AACSB: Reflective Thinking
2140Copyright © 2012 Pearson Education, Inc.
2141542   Parkin · Macroeconomics, Tenth Edition
2142110) Normally in the United States the relationship between nominal and real GDP for a given year
2143is
2144A) real GDP is greater than nominal GDP because of price increases.
2145B) nominal GDP is greater than real GDP because of price increases.
2146C) nominal GDP equals real GDP.
2147D) nominal GDP is greater than real GDP because of price decreases.
2148Answer: B
2149Topic: Nominal GDP
2150Skill: Recognition
2151Question history: Previous edition, Chapter 4
2152AACSB: Reflective Thinking
2153111) Of the following, which is correct?
2154A) Nominal GDP does not change when the production of goods and services increases.
2155B) Nominal GDP is not affected by changes in prices of goods and services.
2156C) Nominal GDP increases when the prices of goods and services increase.
2157D) Real GDP changes only when the prices of goods and services really change.
2158Answer: C
2159Topic: Real and Nominal GDP
2160Skill: Recognition
2161Question history: Previous edition, Chapter 4
2162AACSB: Reflective Thinking
2163112) Real GDP is
2164A) an increase in the average level of prices.
2165B) the value of total production when the unemployment rate is 6 percent.
2166C) the value of total production of all the nationʹs farms, factories, shops and offices measured
2167in the prices of a single year.
2168D) the value of total production of all the nationʹs farms, factories, shops and offices measured
2169at the prices of the year it was produced.
2170Answer: C
2171Topic: Real GDP
2172Skill: Recognition
2173Question history: Previous edition, Chapter 4
2174AACSB: Reflective Thinking
2175113) Real GDP measures the
2176A) total profits earned by all businesses valued using prices from a single year.
2177B) changes in the prices of output measured in dollars.
2178C) general upward drift in prices.
2179D) value of total production linked to prices of a single year.
2180Answer: D
2181Topic: Real GDP
2182Skill: Recognition
2183Question history: Previous edition, Chapter 4
2184AACSB: Reflective Thinking
2185Copyright © 2012 Pearson Education, Inc.
2186Chapter 4   Measuring GDP and Economic Growth   543
2187114) ________ gross domestic product is the value of ________ linked back to the prices of a single
2188year.
2189A) Real; total production
2190B) Real; production possibilities
2191C) Productivity; the consumer price index
2192D) Nominal; total production
2193Answer: A
2194Topic: Real GDP
2195Skill: Recognition
2196Question history: Previous edition, Chapter 4
2197AACSB: Reflective Thinking
2198115) Real Gross Domestic Product is
2199A) the amount of people unemployed divided by the total labor force.
2200B) the productivity of labor.
2201C) the most that can be produced when the economyʹs resources are fully employed.
2202D) the value of total production linked back to the prices of a single year.
2203Answer: D
2204Topic: Real GDP
2205Skill: Recognition
2206Question history: Previous edition, Chapter 4
2207AACSB: Reflective Thinking
2208116) Which of the following is TRUE regarding real GDP?
2209I. Real GDP is the value of the total production of the countryʹs farms, factories, shops, and
2210offices.
2211II. Real GDP rises whenever inflation occurs.
2212III. Real GDP does not measure all that is produced.
2213A) I and II
2214B) I and III
2215C) II and III
2216D) I, II and III
2217Answer: B
2218Topic: Real GDP
2219Skill: Conceptual
2220Question history: Previous edition, Chapter 4
2221AACSB: Reflective Thinking
2222117) In years with inflation, nominal GDP increases ________ real GDP.
2223A) faster than
2224B) slower than
2225C) at the same rate as
2226D) sometimes faster, sometimes slower, and sometimes at the same rate as
2227Answer: A
2228Topic: Real and Nominal GDP
2229Skill: Conceptual
2230Question history: Previous edition, Chapter 4
2231AACSB: Reflective Thinking
2232Copyright © 2012 Pearson Education, Inc.
2233544   Parkin · Macroeconomics, Tenth Edition
2234118) Suppose an economy has some inflation. Then, after a base year, the value of real GDP will
2235A) be less than nominal GDP.
2236B) not be different from nominal GDP.
2237C) be greater than nominal GDP.
2238D) will be approximately half the value of nominal GDP.
2239Answer: C
2240Topic: Real and Nominal GDP
2241Skill: Conceptual
2242Question history: Previous edition, Chapter 4
2243AACSB: Reflective Thinking
2244119) Gross private domestic investment is a component of which approach to measuring GDP?
2245A) incomes approach
2246B) expenditure approach
2247C) linking approach
2248D) output approach
2249Answer: B
2250Topic: Study Guide Question, Expenditure Approach, Investment
2251Skill: Conceptual
2252Question history: Previous edition, Chapter 4
2253AACSB: Reflective Thinking
2254120) Which of the following is NOT a component of the incomes approach to GDP?
2255A) net exports
2256B) wages and salaries
2257C) corporate profits
2258D) proprietorsʹ income
2259Answer: A
2260Topic: Study Guide Question, Incomes Approach
2261Skill: Conceptual
2262Question history: Previous edition, Chapter 4
2263AACSB: Reflective Thinking
22643  The Uses and Limitations of Real GDP
22651) The maximum amount of production that can be produced while avoiding shortages of labor,
2266capital, land, and entrepreneurship that would bring rising inflation is called
2267A) real GDP.
2268B) nominal GDP.
2269C) actual GDP.
2270D) potential GDP.
2271Answer: D
2272Topic: Potential GDP
2273Skill: Recognition
2274Question history: Modified 10th edition
2275AACSB: Reflective Thinking
2276Copyright © 2012 Pearson Education, Inc.
2277Chapter 4   Measuring GDP and Economic Growth   545
22782) Potential GDP is
2279A) another name for real GDP.
2280B) always different from real GDP.
2281C) the level of GDP not adjusted for price changes.
2282D) the maximum amount of GDP that can be produced while avoiding shortages of labor,
2283capital, land, and entrepreneurship that would bring rising inflation.
2284Answer: D
2285Topic: Potential GDP
2286Skill: Recognition
2287Question history: Modified 10th edition
2288AACSB: Reflective Thinking
22893) Potential GDP is
2290A) the maximum GDP that an economy actually achieves throughout its entire history.
2291B) the level of GDP achieved during periods when 100 percent of the labor force is employed.
2292C) a goal that can never be achieved by the economy.
2293D) the maximum amount of GDP that can be produced while avoiding shortages of labor,
2294capital, land, and entrepreneurship that would bring rising inflation.
2295Answer: D
2296Topic: Potential GDP
2297Skill: Recognition
2298Question history: Modified 10th edition
2299AACSB: Reflective Thinking
23004) Potential GDP is the
2301A) the maximum amount of production that can be produced while avoiding shortages of
2302labor, capital, land, and entrepreneurship that would bring rising inflation.
2303B) current value of production in the economy.
2304C) value of production when the economy is in a recession.
2305D) value of production when the economy is at a peak.
2306Answer: A
2307Topic: Potential GDP
2308Skill: Recognition
2309Question history: Modified 10th edition
2310AACSB: Reflective Thinking
23115) Potential GDP
2312A) measures the actual production from year to year.
2313B) measures the maximum amount of production that can be produced while avoiding
2314shortages of labor, capital, land, and entrepreneurship that would bring rising inflation.
2315C) is cyclical.
2316D) Both answers A and C are correct
2317Answer: B
2318Topic: Potential GDP
2319Skill: Conceptual
2320Question history: Modified 10th edition
2321AACSB: Reflective Thinking
2322Copyright © 2012 Pearson Education, Inc.
2323546   Parkin · Macroeconomics, Tenth Edition
23246) In any year, real GDP
2325A) must always be less than potential GDP.
2326B) might be greater or less than potential GDP.
2327C) will always be greater than potential GDP because of the tendency of nations to incur
2328inflation.
2329D) always equals potential GDP.
2330Answer: B
2331Topic: Potential GDP
2332Skill: Conceptual
2333Question history: Previous edition, Chapter 4
2334AACSB: Reflective Thinking
23357) The relationship between real GDP and potential GDP is that
2336A) real GDP always equals potential GDP.
2337B) real GDP never equals potential GDP.
2338C) real GDP fluctuates about potential GDP.
2339D) real GDP is always below potential GDP.
2340Answer: C
2341Topic: Potential GDP
2342Skill: Conceptual
2343Question history: Previous edition, Chapter 4
2344AACSB: Reflective Thinking
23458) In any year, real GDP
2346A) must always be less than potential GDP.
2347B) might be greater or less than potential GDP.
2348C) will be greater than potential GDP if the inflation rate is positive.
2349D) always equals potential GDP.
2350Answer: B
2351Topic: Potential GDP
2352Skill: Conceptual
2353Question history: Modified 10th edition
2354AACSB: Reflective Thinking
23559) ________ refers to a period when the ________ decreases.
2356A) Recession; growth rate of nominal GDP
2357B) Recession; growth rate of output per person
2358C) Productivity growth slowdown; growth rate of real GDP
2359D) Productivity growth slowdown; growth rate of output per person
2360Answer: D
2361Topic: Productivity Growth Slowdown
2362Skill: Recognition
2363Question history: Previous edition, Chapter 4
2364AACSB: Reflective Thinking
2365Copyright © 2012 Pearson Education, Inc.
2366Chapter 4   Measuring GDP and Economic Growth   547
236710) The series of ups and downs the economy tends to move in is called
2368A) the business cycle.
2369B) a recession.
2370C) a depression.
2371D) economic growth.
2372Answer: A
2373Topic: Business Cycle
2374Skill: Recognition
2375Question history: Previous edition, Chapter 4
2376AACSB: Reflective Thinking
237711) The business cycle refers to
2378A) fluctuations in the level of real GDP around potential GDP.
2379B) changes in the level of nominal GDP.
2380C) changes in the level of the stock market.
2381D) changes in the level of employment.
2382Answer: A
2383Topic: Business Cycle
2384Skill: Recognition
2385Question history: Previous edition, Chapter 4
2386AACSB: Reflective Thinking
238712) A business cycle is
2388A) the pattern of short-run upward and downward movements in total output.
2389B) the increase in consumer spending that accompanies an increase in disposable income.
2390C) the cyclical change in the nationʹs balance of trade.
2391D) the cyclical movement in the interest rates.
2392Answer: A
2393Topic: Business Cycle
2394Skill: Recognition
2395Question history: Previous edition, Chapter 4
2396AACSB: Reflective Thinking
239713) The business cycle is the
2398A) regular growth rate of the real GDP.
2399B) regular fluctuations of real GDP below potential GDP.
2400C) irregular fluctuations of prices around real GDP.
2401D) irregular fluctuations of real GDP around potential GDP.
2402Answer: D
2403Topic: Business Cycle
2404Skill: Recognition
2405Question history: Modified 10th edition
2406AACSB: Reflective Thinking
2407Copyright © 2012 Pearson Education, Inc.
2408548   Parkin · Macroeconomics, Tenth Edition
240914) Business cycles are
2410A) irregular, with some having two recessions and no expansion.
2411B) predictable, with a recession following a trough.
2412C) unpredictable, but always have two phases and two turning points.
2413D) unpredictable, and donʹt always have two phases and two turning points.
2414Answer: C
2415Topic: Business Cycle
2416Skill: Recognition
2417Question history: Previous edition, Chapter 4
2418AACSB: Reflective Thinking
241915) Business cycles
2420A) are more volatile during a Republican administration.
2421B) are unpredictable due to political upheavals and global markets.
2422C) follow a pattern of trough, expansion, peak and recession.
2423D) are all identical in duration over the last century.
2424Answer: C
2425Topic: Business Cycle
2426Skill: Conceptual
2427Question history: Previous edition, Chapter 4
2428AACSB: Reflective Thinking
242916) Which of the following statements is true?
2430A) Real GDP fluctuates around potential GDP.
2431B) Potential GDP fluctuates around real GDP.
2432C) Potential GDP is the same as real GDP.
2433D) When all of the economyʹs resources are fully employed, the value of production is called
2434real GDP.
2435Answer: A
2436Topic: Business Cycle
2437Skill: Recognition
2438Question history: Previous edition, Chapter 4
2439AACSB: Reflective Thinking
244017) Real GDP
2441A) fluctuates from year to year but is always below potential GDP.
2442B) fluctuates around potential GDP.
2443C) grows at a constant 3 to 4 percent per year.
2444D) can be called potential GDP when it is adjusted for price changes.
2445Answer: B
2446Topic: Business Cycle
2447Skill: Recognition
2448Question history: Previous edition, Chapter 4
2449AACSB: Reflective Thinking
2450Copyright © 2012 Pearson Education, Inc.
2451Chapter 4   Measuring GDP and Economic Growth   549
245218) The term ʺbusiness cycleʺ most closely refers to the
2453A) fluctuating profits of firms.
2454B) fiscal year.
2455C) accounting period used by firms.
2456D) alternating periods of expansions and recessions.
2457Answer: D
2458Topic: Business Cycle
2459Skill: Recognition
2460Question history: Previous edition, Chapter 4
2461AACSB: Reflective Thinking
246219) Which of the following is not a phase or turning point of the business cycle?
2463A) recession
2464B) expansion
2465C) shutdown
2466D) trough
2467Answer: C
2468Topic: Business Cycle
2469Skill: Recognition
2470Question history: Previous edition, Chapter 4
2471AACSB: Reflective Thinking
247220) The four parts of the business cycle occur in the following order:
2473A) recession, trough, peak, expansion.
2474B) expansion, trough, peak, recession.
2475C) recession, trough, expansion, peak.
2476D) expansion, trough, recession, peak.
2477Answer: C
2478Topic: Business Cycle
2479Skill: Recognition
2480Question history: Previous edition, Chapter 4
2481AACSB: Reflective Thinking
248221) Which of the following are parts of the business cycles?
2483A) peak and potential GDP
2484B) real GDP and potential GDP
2485C) recession and expansion
2486D) inflation and recession
2487Answer: C
2488Topic: Business Cycle
2489Skill: Recognition
2490Question history: Previous edition, Chapter 4
2491AACSB: Reflective Thinking
2492Copyright © 2012 Pearson Education, Inc.
2493550   Parkin · Macroeconomics, Tenth Edition
249422) Which of the following is TRUE regarding business cycles?
2495I. Cycles are predictable.
2496II. In each cycle, a peak follows an expansion.
2497III. Potential GDP fluctuates around real GDP.
2498A) I and II
2499B) I and III
2500C) II and III
2501D) II only
2502Answer: D
2503Topic: Business Cycle
2504Skill: Conceptual
2505Question history: Previous edition, Chapter 4
2506AACSB: Reflective Thinking
250723) A common definition of a recession is a time with
2508A) a decline in the price level.
2509B) a decline in interest rates.
2510C) a decrease in real GDP for two or more successive quarters.
2511D) a decrease in real GDP for two or more successive years.
2512Answer: C
2513Topic: Business Cycle
2514Skill: Recognition
2515Question history: Modified 10th edition
2516AACSB: Reflective Thinking
251724) A recession is commonly defined as a period with
2518A) negative growth rate in real GDP that lasts at least one quarter.
2519B) positive growth rate in real GDP that lasts at least one quarter.
2520C) positive growth rate in real GDP that lasts at least two quarters.
2521D) negative growth rate in real GDP that lasts at least two quarters.
2522Answer: D
2523Topic: Business Cycle
2524Skill: Recognition
2525Question history: Previous edition, Chapter 4
2526AACSB: Reflective Thinking
252725) A common definition of a recession is a period of time
2528A) of at least 6 months during which real GDP decreases.
2529B) with an increase in real economic output from the previous period.
2530C) with no change in real GDP.
2531D) with no change in the dollar (money) value of economic output.
2532Answer: A
2533Topic: Business Cycle
2534Skill: Recognition
2535Question history: Previous edition, Chapter 4
2536AACSB: Reflective Thinking
2537Copyright © 2012 Pearson Education, Inc.
2538Chapter 4   Measuring GDP and Economic Growth   551
253926) A recession is commonly defined as occurring when
2540A) real GDP decreases for a period of 12 or more months.
2541B) real GDP decreases for a period of 6 or more months.
2542C) the unemployment rate rises above 7.5 percent for 6 or more months.
2543D) the unemployment rate rises above 5.0 percent for 12 or more months.
2544Answer: B
2545Topic: Business Cycle
2546Skill: Recognition
2547Question history: Previous edition, Chapter 4
2548AACSB: Reflective Thinking
254927) By common definition, a recession occurs when
2550A) the international deficit worsens for at least two successive quarters.
2551B) the government budget deficit exceeds the national debt.
2552C) the inflation rate exceeds 3.5 percent.
2553D) real GDP decreases for at least two successive quarters.
2554Answer: D
2555Topic: Business Cycle
2556Skill: Recognition
2557Question history: Previous edition, Chapter 4
2558AACSB: Reflective Thinking
255928) Recessions are commonly defined to occur
2560A) whenever unemployment increases.
2561B) when growth in real GDP decreases for two consecutive quarters.
2562C) when growth in real GDP is negative for two consecutive quarters.
2563D) when the unemployment rate exceeds 6 percent.
2564Answer: C
2565Topic: Business Cycle
2566Skill: Recognition
2567Question history: Previous edition, Chapter 4
2568AACSB: Reflective Thinking
256929) Real GDP decreases during
2570A) the movement from trough to peak.
2571B) the movement from below potential GDP back to potential GDP.
2572C) the movement from peak to trough.
2573D) a decrease in unemployment.
2574Answer: C
2575Topic: Business Cycle
2576Skill: Recognition
2577Question history: Modified 10th edition
2578AACSB: Reflective Thinking
2579Copyright © 2012 Pearson Education, Inc.
2580552   Parkin · Macroeconomics, Tenth Edition
258130) When a recession ends, the turning point that immediately follows is called a
2582A) trough.
2583B) peak.
2584C) depression.
2585D) None of the above answers is correct.
2586Answer: A
2587Topic: Business Cycle
2588Skill: Recognition
2589Question history: Previous edition, Chapter 4
2590AACSB: Reflective Thinking
259131) The low point of economic activity during a business cycle is called the
2592A) trough.
2593B) recession.
2594C) peak.
2595D) failure.
2596Answer: A
2597Topic: Business Cycle
2598Skill: Recognition
2599Question history: New 10th edition
2600AACSB: Reflective Thinking
260132) What term is used to describe the lowest point of a business cycle?
2602A) peak
2603B) trough
2604C) expansion
2605D) recession
2606Answer: B
2607Topic: Business Cycle
2608Skill: Recognition
2609Question history: Previous edition, Chapter 4
2610AACSB: Reflective Thinking
261133) A trough is the
2612A) lower turning point of a business cycle when an expansion begins.
2613B) lower turning point of a business cycle when a recession begins.
2614C) upper turning point of a business cycle when an expansion begins.
2615D) upper turning point of a business cycle when a recession begins.
2616Answer: A
2617Topic: Business Cycle
2618Skill: Recognition
2619Question history: Previous edition, Chapter 4
2620AACSB: Reflective Thinking
2621Copyright © 2012 Pearson Education, Inc.
2622Chapter 4   Measuring GDP and Economic Growth   553
262334) An expansion occurs when the level of real GDP is
2624A) increasing.
2625B) decreasing.
2626C) at a cyclical peak.
2627D) at a cyclical trough.
2628Answer: A
2629Topic: Business Cycle
2630Skill: Recognition
2631Question history: Previous edition, Chapter 4
2632AACSB: Reflective Thinking
263335) An expansion
2634A) follows a peak.
2635B) is defined as a period of negative real GDP growth.
2636C) comes just before a trough.
2637D) is defined as a period of real GDP increases.
2638Answer: D
2639Topic: Business Cycle
2640Skill: Recognition
2641Question history: Previous edition, Chapter 4
2642AACSB: Reflective Thinking
264336) An expansion ends when the economy
2644A) hits a trough and then enters a recession.
2645B) hits a peak and then enters a recession.
2646C) begins to grow following a peak.
2647D) has grown for two quarters in a row.
2648Answer: B
2649Topic: Business Cycle
2650Skill: Recognition
2651Question history: Previous edition, Chapter 4
2652AACSB: Reflective Thinking
265337) The times during which real GDP increases are referred to as
2654A) contractions.
2655B) expansions.
2656C) anti-cycles.
2657D) corrections.
2658Answer: B
2659Topic: Business Cycle
2660Skill: Recognition
2661Question history: Previous edition, Chapter 4
2662AACSB: Reflective Thinking
2663Copyright © 2012 Pearson Education, Inc.
2664554   Parkin · Macroeconomics, Tenth Edition
266538) Suppose the country of Dingo experienced an economic trough in January 2011. We can
2666conclude that
2667A) real GDP in Dingo was increasing in January 2011.
2668B) an expansion occurred after January 2011.
2669C) Dingo did not experience a recession in 2010.
2670D) Dingoʹs potential GDP fell in 2011.
2671Answer: B
2672Topic: Business Cycle
2673Skill: Conceptual
2674Question history: Previous edition, Chapter 10
2675AACSB: Reflective Thinking
267639) An economy recovering from a recession
2677A) moves up from its trough to a period of expansion.
2678B) moves up from its peak to a period of expansion.
2679C) moves down from its trough to a period of depression.
2680D) moves down from its peak to a period of expansion.
2681Answer: A
2682Topic: Business Cycle
2683Skill: Conceptual
2684Question history: Previous edition, Chapter 4
2685AACSB: Reflective Thinking
268640) An economic expansion rather than a recession occurs
2687A) when the federal budget is balanced.
2688B) when the unemployment rate falls below 5 percent.
2689C) when growth in real GDP is positive.
2690D) when the unemployment rate is not changing.
2691Answer: C
2692Topic: Business Cycle
2693Skill: Recognition
2694Question history: Modified 10th edition
2695AACSB: Reflective Thinking
269641) A peak is the
2697A) lower turning point of a business cycle when an expansion ends.
2698B) lower turning point of a business cycle when a recession ends.
2699C) upper turning point of a business cycle when an expansion ends.
2700D) upper turning point of a business cycle when a recession ends.
2701Answer: C
2702Topic: Business Cycle
2703Skill: Recognition
2704Question history: Previous edition, Chapter 4
2705AACSB: Reflective Thinking
2706Copyright © 2012 Pearson Education, Inc.
2707Chapter 4   Measuring GDP and Economic Growth   555
270842) In the above figure, the distance between points S and T represents
2709A) an expansion.
2710B) a trough.
2711C) a peak.
2712D) a recession.
2713Answer: D
2714Topic: Business Cycle
2715Skill: Analytical
2716Question history: Previous edition, Chapter 4
2717AACSB: Analytical Skills
271843) In the above figure, the distance between points T and U represents
2719A) an expansion.
2720B) a trough.
2721C) a peak.
2722D) a recession.
2723Answer: A
2724Topic: Business Cycle
2725Skill: Analytical
2726Question history: Previous edition, Chapter 4
2727AACSB: Analytical Skills
2728Copyright © 2012 Pearson Education, Inc.
2729556   Parkin · Macroeconomics, Tenth Edition
273044) In the above figure, a recession begins at point ________ and an expansion begins at point
2731________.
2732A) a; b
2733B) b; c
2734C) b; a
2735D) d; c
2736Answer: A
2737Topic: Business Cycle
2738Skill: Analytical
2739Question history: Previous edition, Chapter 4
2740AACSB: Analytical Skills
274145) In the above figure, a trough is at point ________ and a peak is at point ________.
2742A) a; b
2743B) b; c
2744C) b; a
2745D) d; c
2746Answer: C
2747Topic: Business Cycle
2748Skill: Analytical
2749Question history: Previous edition, Chapter 4
2750AACSB: Analytical Skills
2751Copyright © 2012 Pearson Education, Inc.
2752Chapter 4   Measuring GDP and Economic Growth   557
275346) In the above figure, which point represents the under use of resources?
2754A) point F
2755B) point G
2756C) point H
2757D) point K
2758Answer: B
2759Topic: Business Cycle
2760Skill: Conceptual
2761Question history: Previous edition, Chapter 4
2762AACSB: Analytical Skills
276347) In the above figure, which point represents a situation with significant shortages of labor,
2764capital, and other resources?
2765A) point F
2766B) point G
2767C) point I
2768D) point K
2769Answer: A
2770Topic: Business Cycle
2771Skill: Conceptual
2772Question history: Modified 10th edition
2773AACSB: Analytical Skills
2774Copyright © 2012 Pearson Education, Inc.
2775558   Parkin · Macroeconomics, Tenth Edition
277648) In the above figure, which point represents an economy which is at the peak part of a business
2777cycle?
2778A) point F
2779B) point G
2780C) point I
2781D) point K
2782Answer: A
2783Topic: Business Cycle
2784Skill: Recognition
2785Question history: Previous edition, Chapter 4
2786AACSB: Analytical Skills
278749) In the above figure, the letters A, B, and C represent which positions in the business cycle?
2788A) peak, expansion, and recession, respectively
2789B) recession, expansion, and peak, respectively
2790C) expansion, peak, and recession, respectively
2791D) peak, recession, and expansion, respectively
2792Answer: D
2793Topic: Business Cycle
2794Skill: Analytical
2795Question history: Previous edition, Chapter 4
2796AACSB: Analytical Skills
2797Copyright © 2012 Pearson Education, Inc.
2798Chapter 4   Measuring GDP and Economic Growth   559
279950) Real GDP is not a perfect indicator of economic welfare because ________.
2800A) it includes the underground economy
2801B) it includes a direct measure of health and life expectancy
2802C) it underestimates inflation
2803D) economic welfare depends on many factors not measured or not measured accurately by
2804real GDP
2805Answer: D
2806Topic: GDP and Economic Welfare Comparisons
2807Skill: Recognition
2808Question history: Previous edition, Chapter 4
2809AACSB: Reflective Thinking
281051) Real GDP does not show the state of economic welfare in a country in part because GDP omits
2811I. household production.
2812II. leisure time available.
2813III. the quality of the environment.
2814A) I only
2815B) I and III
2816C) II and III
2817D) I, II and III
2818Answer: D
2819Topic: GDP and Economic Welfare Comparisons
2820Skill: Conceptual
2821Question history: Previous edition, Chapter 4
2822AACSB: Reflective Thinking
282352) Real GDP can be criticized as a measure of economic welfare because it
2824A) does not include the value of products produced in the household.
2825B) does not take account of the degradation of environmental quality.
2826C) does not include leisure time available to a society.
2827D) All of the above answers are correct.
2828Answer: D
2829Topic: Economic Welfare Comparisons
2830Skill: Conceptual
2831Question history: Previous edition, Chapter 4
2832AACSB: Reflective Thinking
283353) A country that has a large real GDP per person might not necessarily have a high level of
2834economic welfare because it may have
2835A) very little political freedom.
2836B) environmental problems.
2837C) little leisure time.
2838D) All of the above answers are correct.
2839Answer: D
2840Topic: GDP and Economic Welfare Comparisons
2841Skill: Conceptual
2842Question history: Previous edition, Chapter 4
2843AACSB: Reflective Thinking
2844Copyright © 2012 Pearson Education, Inc.
2845560   Parkin · Macroeconomics, Tenth Edition
284654) Which, if any, of the following causes reported GDP to be less than total economic production?
2847A) the exclusion of household production
2848B) the exclusion of government transfers
2849C) the inclusion of government expenditures
2850D) None of the above cause reported GDP to be less than total production.
2851Answer: A
2852Topic: Household Production
2853Skill: Recognition
2854Question history: Modified 10th edition
2855AACSB: Reflective Thinking
285655) In calculating GDP, household production is
2857A) included as part of consumption.
2858B) ignored because it is not a large amount.
2859C) not included because there is no market transaction.
2860D) included under employee compensation.
2861Answer: C
2862Topic: Household Production
2863Skill: Conceptual
2864Question history: Previous edition, Chapter 4
2865AACSB: Reflective Thinking
286656) Which of the following is NOT included in real GDP?
2867A) production of services, such as the services of doctors
2868B) production of goods that last more than one year, such as television sets
2869C) production of goods that do not last more than one year, such as gasoline
2870D) production in the home
2871Answer: D
2872Topic: Household Production
2873Skill: Recognition
2874Question history: Previous edition, Chapter 4
2875AACSB: Reflective Thinking
287657) If a larger fraction of the adult population is working in the marketplace, household production
2877A) counted in real GDP increases.
2878B) not counted in real GDP increases.
2879C) counted in real GDP decreases.
2880D) not counted in real GDP decreases.
2881Answer: D
2882Topic: Household Production
2883Skill: Analytical
2884Question history: Previous edition, Chapter 4
2885AACSB: Reflective Thinking
2886Copyright © 2012 Pearson Education, Inc.
2887Chapter 4   Measuring GDP and Economic Growth   561
288858) Reported GDP increases when, in fact, total production is unchanged when
2889i. there is a shift from household production to market production.
2890ii. a previously illegal activity is legalized.
2891A) i only
2892B) ii only
2893C) Neither i nor ii
2894D) Both i and ii.
2895Answer: D
2896Topic: Household Production, Underground Economic Activity
2897Skill: Conceptual
2898Question history: Modified 10th edition
2899AACSB: Reflective Thinking
290059) When calculating GDP, underground economic activity is
2901A) the production of goods and services in the home.
2902B) that portion of the time when we are enjoying leisure activities and not producing
2903marketable goods.
2904C) the part of the economy purposely hidden.
2905D) an aspect of the quality of life, such as health and life expectancy.
2906Answer: C
2907Topic: Underground Economic Activity
2908Skill: Recognition
2909Question history: Previous edition, Chapter 4
2910AACSB: Reflective Thinking
291160) In part, the underground economy exists because of the
2912A) irrationality of people who choose to evade taxes.
2913B) high tax rates.
2914C) ease of entry into the occupations that compose it.
2915D) greater efficiency of barter transactions compared to monetary ones.
2916Answer: B
2917Topic: Underground Economic Activity
2918Skill: Conceptual
2919Question history: Previous edition, Chapter 4
2920AACSB: Reflective Thinking
292161) Which of the following is NOT included in real GDP?
2922A) production of services, such as the services of hair dressers
2923B) production of goods that last less than a year, such as production of hot dogs
2924C) production that takes place in the underground economy
2925D) production of goods that last more than a year, such as a pair of roller blades
2926Answer: C
2927Topic: Underground Economic Activity
2928Skill: Recognition
2929Question history: Previous edition, Chapter 4
2930AACSB: Reflective Thinking
2931Copyright © 2012 Pearson Education, Inc.
2932562   Parkin · Macroeconomics, Tenth Edition
293362) The underground economy exists for all of the following reasons EXCEPT the
2934A) production of illegal goods.
2935B) avoidance of taxes.
2936C) desire to maintain accurate records of economic transactions.
2937D) avoidance of government regulation.
2938Answer: C
2939Topic: Underground Economic Activity
2940Skill: Conceptual
2941Question history: Previous edition, Chapter 4
2942AACSB: Reflective Thinking
294363) Because pollution reduces economic welfare, on this count real GDP as measured
2944A) decreases as pollution increases.
2945B) increases to take into account the expenditures that will be made in the future to clean up
2946the pollution.
2947C) overstates economic welfare.
2948D) understates economic welfare.
2949Answer: C
2950Topic: Environmental Quality
2951Skill: Conceptual
2952Question history: Modified 10th edition
2953AACSB: Reflective Thinking
295464) In the post World War II period, considerable growth in total production took place in the
2955United States. But at the same time, businesses were dumping their waste into the Great Lakes
2956with minimal cost to themselves, significantly polluting the bodies of water as a result. This
2957occurrence is an example where
2958A) real GDP gives an overly positive view of economic welfare.
2959B) real GDP gives an overly negative view of economic welfare.
2960C) investment would have been a better measure of total production.
2961D) the pollution counts as a final good.
2962Answer: A
2963Topic: Environmental Quality
2964Skill: Conceptual
2965Question history: Modified 10th edition
2966AACSB: Reflective Thinking
296765) Which of the following would lead GDP to overstate economic welfare?
2968A) the existence of home-cooked meals
2969B) restaurant workers that under-report tip income
2970C) a self-employed CPA who takes a longer than normal vacation
2971D) electric utilities that switch to burning coal because of higher natural gas prices and
2972thereby create more acid rain pollution
2973Answer: D
2974Topic: Environmental Quality
2975Skill: Conceptual
2976Question history: Previous edition, Chapter 4
2977AACSB: Reflective Thinking
2978Copyright © 2012 Pearson Education, Inc.
2979Chapter 4   Measuring GDP and Economic Growth   563
298066) Purchasing power parity prices are used to construct GDP data that
2981A) do not omit the underground economy.
2982B) can be used to make more valid comparisons between one country and another.
2983C) is a proper measure of economic welfare.
2984D) adjust for differences in population.
2985Answer: B
2986Topic: Purchasing Power Parity Prices
2987Skill: Conceptual
2988Question history: Previous edition, Chapter 4
2989AACSB: Reflective Thinking
299067) If we compare the U.S. GDP and the Chinese GDP,
2991A) real GDP per person is about the same in the two countries.
2992B) U.S. real GDP per person is less than Chinaʹs real GDP per person once we adjust for
2993currency differences.
2994C) Chinaʹs real GDP per person is less than real GDP per person in the United States.
2995D) real U.S. GDP per person was much larger than Chinaʹs real GDP per person when
2996purchasing power parity prices are used but is less than Chinaʹs real GDP per person
2997when exchange rate prices are used.
2998Answer: C
2999Topic: Purchasing Power Parity Prices
3000Skill: Recognition
3001Question history: Previous edition, Chapter 4
3002AACSB: Reflective Thinking
300368) The use of purchasing power parity prices
3004A) decreases the real GDP per person statistics published by the International Monetary
3005Fund.
3006B) weakens the validity of cross country comparisons of economic welfare.
3007C) increases the amount by which U.S. GDP is larger than that of any other nation.
3008D) accounts for differences in the prices of the same goods in different countries when
3009measuring real GDP.
3010Answer: D
3011Topic: Purchasing Power Parity Prices
3012Skill: Conceptual
3013Question history: Previous edition, Chapter 4
3014AACSB: Reflective Thinking
301569) Pollution is a by-product of some production processes, so on this count real GDP as measured
3016A) is adjusted downward to take into account the pollution.
3017B) is adjusted upward to take into account the expenditures that will be made in the future to
3018clean up the pollution.
3019C) tends to overstate economic welfare.
3020D) tends to understate economic welfare.
3021Answer: C
3022Topic: Study Guide Question, Environmental Quality
3023Skill: Conceptual
3024Question history: Previous edition, Chapter 4
3025AACSB: Reflective Thinking
3026Copyright © 2012 Pearson Education, Inc.
3027564   Parkin · Macroeconomics, Tenth Edition
302870) Which of the following is NOT a reason that real GDP is a poor measure of a nationʹs economic
3029welfare?
3030A) Real GDP omits measures of political freedom.
3031B) Real GDP does not take into account the value of peopleʹs leisure time.
3032C) Real GDP does not include the underground economy.
3033D) Real GDP overvalues household production.
3034Answer: D
3035Topic: Study Guide Question, Household Production
3036Skill: Conceptual
3037Question history: Previous edition, Chapter 4
3038AACSB: Reflective Thinking
303971) Which of the following statements about the comparison between GDP in China and in the
3040United States is correct?
3041A) Using the exchange rate to value Chinaʹs GDP in dollars shows that Chinaʹs GDP per
3042person exceeds the GDP per person in the United States.
3043B) Using purchasing power parity prices to value Chinaʹs GDP in dollars shows that Chinaʹs
3044GDP per person exceeds the GDP per person in the United States.
3045C) Chinaʹs GDP per person is higher using purchasing power parity prices rather than the
3046exchange rate when valuing Chinaʹs GDP in dollars.
3047D) None of the above answers are correct because they are all false statements.
3048Answer: C
3049Topic: Study Guide Question, International Comparisons
3050Skill: Recognition
3051Question history: Previous edition, Chapter 4
3052AACSB: Reflective Thinking
305372) What we produce during our working time is ________ as part of GDP and the enjoyment we
3054gain from our leisure time is ________ as part of GDP.
3055A) included; not included
3056B) included; included
3057C) not included; included
3058D) not included; not included
3059Answer: A
3060Topic: GDP and Economic Welfare Comparisons
3061Skill: Recognition
3062Question history: Previous edition, Chapter 4
3063AACSB: Reflective Thinking
3064Copyright © 2012 Pearson Education, Inc.
3065Chapter 4   Measuring GDP and Economic Growth   565
30664  News Based Questions
3067ʺAs the credit crisis unfolded over the past year, one of the few certainties in the global economy seemed to
3068be Chinaʹs ability to plough on regardless of double-digit growth rates...The ...crisis  has also focused ...on
3069the need to update a growth model that...is still dependent on assembling goods for export without adding
3070much value and on heavy industries that create pollution.  Chinese companies have continued to find new
3071foreign markets for their products...several other factors point to a slowing property market...production of
3072steel, cement and air conditioners was down... Retail sales have risen by 23 per cent in each of the last two
3073monthsʺ.
3074Beijingʹs Burden, www.FT.com, by Geoff Dyer, Sept. 23, 2008
30751) According to the article, ________ are expected to contribute ________ to Chinaʹs real GDP in
30762008.
3077A) exports and consumption; positively
3078B) consumption and government spending; negatively
3079C) exports and investment; negatively
3080D) rental income and investment; negatively
3081Answer: A
3082Topic: GDP
3083Skill: Conceptual
3084Question history: Previous edition, Chapter 4
3085AACSB: Communication
30862) According to the article, ________ can be expected to ________ this year.
3087A) exports; increase
3088B) consumption; decrease
3089C) imports;  decrease
3090D) net interest income; decrease
3091Answer: A
3092Topic: GDP
3093Skill: Conceptual
3094Question history: Previous edition, Chapter 4
3095AACSB: Communication
30963) According to the article, ________ is expected to increase and add to Chinaʹs ________
3097component of GDP.
3098A) retail sales;  consumption
3099B) retail sales; investment
3100C) rental income; investment
3101D) rental income; exports
3102Answer: A
3103Topic: GDP
3104Skill: Conceptual
3105Question history: Previous edition, Chapter 4
3106AACSB: Communication
3107Copyright © 2012 Pearson Education, Inc.
3108566   Parkin · Macroeconomics, Tenth Edition
3109Canadaʹs economy expanded by...0.1 percent in the second quarter...further evidence that the economy has
3110stalled...following a first quarter slip in gross domestic product.  The second quarter figures fell well below
3111forecasts of a 0.7 per cent growth in real GDP.  Exports....fell for the fourth consecutive quarter. The
3112accumulating gloom is increasingly discouraging business investment. Consumer spending remains strong
3113and corporate profits were at their highest since 2004.  ʺThe sources of strength in the second quarter are
3114clearly unsustainable,ʺ said Sal Gautieri, senior economist at BMO capital markets.
3115Canada Avoids Fall into Recession, www.FT.com, by Christopher Mason, August 30, 2008
31164) According to the article, the best description of Canadaʹs position in the business cycle is
3117A) at a peak
3118B) at a trough
3119C) in an expansion
3120D) in a recession
3121Answer: A
3122Topic: Business Cycle
3123Skill: Conceptual
3124Question history: Previous edition, Chapter 4
3125AACSB: Communication
31265) According to the article, ________ in ________ have contributed to Canadaʹs ________ change in
3127real GDP.
3128A) increases; consumption and exports;  expected
3129B) decreases; exports and investment; unexpected
3130C) increases; consumption and investment; unexpected
3131D) decreases; exports and government spending; expected
3132Answer: B
3133Topic: GDP
3134Skill: Conceptual
3135Question history: Previous edition, Chapter 4
3136AACSB: Communication
31376) It is estimated that in 2007, Mexico had a population of 110 million and Brazil had a population
3138of 190 million.  At the same time, Mexicoʹs GDP was $1 trillion while Brazilʹs was $1.31 trillion.
3139These data show that
3140A) Brazil had a healthier economy than did Mexico.
3141B) Mexicoʹs GDP per person was lower than was Brazilʹs GDP per person in 2007.
3142C) Mexicoʹs GDP per person was $9090 in 2007.
3143D) Brazilʹs GDP per person was $5300 in 2007.
3144Answer: C
3145Topic: GDP Growth Rate
3146Skill: Analytical
3147Question history: Previous edition, Chapter 4
3148AACSB: Analytical Skills
3149Copyright © 2012 Pearson Education, Inc.
3150Chapter 4   Measuring GDP and Economic Growth   567
31517) It is estimated that in 2007, Mexico had a population of 110 million and GDP of $1 trillion.  In
31522006, Mexicoʹs population was 104 million and GDP was $839 billion. Per GDP person ________
3153by ________ between 2006 and 2007 in Mexico.
3154A) increased; $1038
3155B) increased; 5 percent
3156C) decreased; $2013
3157D) decreased;  5 percent
3158Answer: A
3159Topic: GDP Growth Rate
3160Skill: Analytical
3161Question history: Previous edition, Chapter 4
3162AACSB: Analytical Skills
31638) The following data describe Mexicoʹs economy in 2007.  
3164Government spending $210 billion
3165Investment $210 billion
3166Exports $272 billion
3167Imports $283 billion
3168GDP 1 trillion
3169Population 110 million
3170From the data, we can conclude that  ________ in Mexico in 2007.
3171A) Consumption totaled $591 billion
3172B) Net exports totaled -$11 billion.
3173C) GDP per person equalled $2000
3174D) Imports were the largest component of GDP
3175Answer: A
3176Topic: GDP
3177Skill: Analytical
3178Question history: Previous edition, Chapter 4
3179AACSB: Analytical Skills
31809) The following data describe Franceʹs economy in 2008.  
3181Consumption 234 billion euros
3182Government expenditure 93 billion euros
3183Investment 88 billion euros
3184Exports 128 billion euros
3185Imports 137 billion euros
3186From the data, we can conclude that in France
3187A) net exports totaled -11 billion euros.
3188B) GDP equaled 424 billion euros.
3189C) GDP equaled 680 billion euros.
3190D) Net exports totaled 265 billion euros.
3191Answer: A
3192Topic: GDP
3193Skill: Analytical
3194Question history: Previous edition, Chapter 4
3195AACSB: Analytical Skills
3196Copyright © 2012 Pearson Education, Inc.
3197568   Parkin · Macroeconomics, Tenth Edition
319810) The following data are estimates describing Irelandʹs economy in 2006 and 2007 (in millions of
3199euros, in constant prices):
32002006 2007
3201Consumption 84,000 89,000
3202Government expenditure 24,000 26,000
3203Investment 48,000 48,000
3204Exports 142,000 151,000
3205Imports 123,000 128,000
3206Subsidies 1,800 1,900
3207Taxes 500 500
3208Irelandʹs real GDP in 2007 was ________ million euros.
3209A) 442,000
3210B) 186,000
3211C) 188,400
3212D) 163,000
3213Answer: B
3214Topic: GDP
3215Skill: Analytical
3216Question history: Previous edition, Chapter 4
3217AACSB: Analytical Skills
321811) The following data are estimates describing Irelandʹs economy in 2006 and 2007 (in millions of
3219euros, in constant prices):
32202006 2007
3221Consumption 84,000 89,000
3222Government expenditure 24,000 26,000
3223Investment 48,000 48,000
3224Exports 142,000 151,000
3225Imports 123,000 128,000
3226Subsidies 1,800 1,900
3227Taxes 500 500
3228In 2007, Irelandʹs net exports was ________ million euros.
3229A) 23,000
3230B) -23,000
3231C) 279,000
3232D) 149,100
3233Answer: A
3234Topic: GDP
3235Skill: Analytical
3236Question history: Previous edition, Chapter 4
3237AACSB: Analytical Skills
3238Copyright © 2012 Pearson Education, Inc.
3239Chapter 4   Measuring GDP and Economic Growth   569
324012) The following data are estimates describing Irelandʹs economy in 2006 and 2007 (in millions of
3241euros, in constant prices):
32422006 2007
3243Consumption 84,000 89,000
3244Government expenditure 24,000 26,000
3245Investment 48,000 48,000
3246Exports 142,000 151,000
3247Imports 123,000 128,000
3248Subsidies 1,800 1,900
3249Taxes 500 500
3250Which of the following is true regarding Irelandʹs economy?
3251A) The change in GDP from 2006 to 2007 represented a peak in the business cycle.
3252B) GDP decreased from 2006 to 2007.
3253C) Net exports decreased from 2006 to 2007.
3254D) Consumption was 48 percent of Irelandʹs GDP in 2007.
3255Answer: D
3256Topic: GDP
3257Skill: Conceptual
3258Question history: Previous edition, Chapter 4
3259AACSB: Analytical Skills
3260ʺLife expectancy is exceptionally high in Japan.  Scores for political freedom and civil liberties approach those
3261of peer countries in Europe...equality of opportunity is extremely weak.  The country also possesses one of
3262the longer working weeks.ʺ  Japanʹs GDP was estimated to be  $4.2 trillion (purchasing power parity) and the
3263population was 127.4 million.
3264ʺDriven by its attractive climate, Brazil performs substantially better on Life Satisfaction than Material
3265Wealth. High international demand for Brazilʹs commodities and raw materials has produced a sustained
3266economic expansion since 2004, which in turn has led to job creation, wage growth and relatively low
3267inflation. Brazilians report that they control their own lives to a substantial degree.ʺ  Brazilʹs GDP was
3268estimated to be $1.7 trillion (purchasing power parity) and 190 million in 2006.
3269www.prosperity.com
327013) According to the article, we can conclude that the standard of living
3271A) is higher in Brazil because its citizens feel more control over their lives and have
3272experienced job and wage growth.
3273B) is higher in Japan because their life expectancy is longer.
3274C) is higher in Japan because its GDP is higher.
3275D) might be higher in Japan because it has a higher per capita real GDP but other factors such
3276as Braziliansʹ satisfaction with their lives and economic growth should be considered
3277when determining economic well being.
3278Answer: D
3279Topic: GDP and Economic Welfare Comparisons
3280Skill: Conceptual
3281Question history: Previous edition, Chapter 4
3282AACSB: Communication
3283Copyright © 2012 Pearson Education, Inc.
3284570   Parkin · Macroeconomics, Tenth Edition
328514) According to the information, Japanʹs real GDP per person
3286A) is higher than Brazilʹs and therefore we can definitely conclude that economic well-being
3287is higher in Japan.
3288B) is $33,000.
3289C) is lower than Brazilʹs, but its real GDP is higher which makes standard of living higher in
3290Japan.
3291D) cannot be expected to change much given the other factors affecting GDP growth
3292including political freedom and life expectancy.
3293Answer: B
3294Topic: GDP and Economic Welfare Comparisons
3295Skill: Analytical
3296Question history: Previous edition, Chapter 4
3297AACSB: Analytical Skills
329815) The United Nationʹs Human Development Report (2006) ranked Norway first in its Human
3299Development Index with GDP per person equal to $38,454.  The United States , with GDP per
3300person of $39,676, is ranked eighth.  Which of the following could explain this ranking?
3301A) Other factors, like life expectancy and education are higher in Norway.
3302B) Norway has a lower GDP than the United State.
3303C) The United States has a lower unemployment rate than does Norway.
3304D) The United States has a higher population growth rate.
3305Answer: A
3306Topic: GDP and Economic Welfare Comparisons
3307Skill: Conceptual
3308Question history: Previous edition, Chapter 4
3309AACSB: Reflective Thinking
331016)  ʺGerman economic growth slowed ... Economic growth slowed to 0.3 percent from 0.5 percent.
3311Expansion was driven by exports... (and) household consumption added ...to growth.  As
3312unemployment declines and disposable incomes increase, household spending may also gain
3313momentum.  
3314www.bloomberg.com, August 23, 2007
3315We can conclude that the German economy
3316A) is at the peak of the business cycle.
3317B) has entered the expansion phase of the business cycle.
3318C) has slowed due to a decline in investment or government spending.
3319D) is in the recession phase of the business cycle.
3320Answer: C
3321Topic: GDP
3322Skill: Conceptual
3323Question history: Previous edition, Chapter 4
3324AACSB: Communication
3325Copyright © 2012 Pearson Education, Inc.
3326Chapter 4   Measuring GDP and Economic Growth   571
332717) The data show Argentinaʹs GDP (using purchasing power parity) in billions of dollars.
3328Year 1990  1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
3329GDP($)   182    209   235   255   277   274   294   324   340   333   338   330   300   333   373    420   470
3330The data show that
3331A) Argentinaʹs economy was in a recession from 2004 through 2006.
3332B) Argentinaʹs economy was in a recession in 2001 and 2002.
3333C) GDP per person more than doubled between 1990 and 2006.
3334D) Argentinaʹs economy reached a peak in 1996.
3335Answer: B
3336Topic: Business Cycle
3337Skill: Analytical
3338Question history: Previous edition, Chapter 4
3339AACSB: Analytical Skills
334018) The data show Argentinaʹs GDP (using purchasing power parity) in billions of dollars.
3341Year 1990  1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
3342GDP($)   182    209   235   255   277   274   294   324   340   333   338   330   300   333   373    420   470
3343The data show that
3344A) Argentinaʹs economy reached a peak in 1998.
3345B) GDP per person increased between 1990 and 2006.
3346C) Argentinaʹs potential GDP doubled between 1990 and 2006.
3347D) Argentinaʹs economy entered a recession in 2000.
3348Answer: A
3349Topic: Business Cycle
3350Skill: Analytical
3351Question history: Previous edition, Chapter 4
3352AACSB: Analytical Skills
335319) The following data show Uruguayʹs GDP using purchasing power parity in billions of dollars.
3354Year          2000   2001   2002   2003   2004   2005   2006   2007  2008
3355GDP($)      26.1     25.8   23.3    24.3    27.9   30.1    33.9    37.2    40.2
3356Using the data, we can conclude that
3357A) Uruguayʹs economy reached a peak in 2000.
3358B) GDP per person in Uruguay almost doubled between 2000 and 2008.
3359C) potential GDP in Uruguay doubled between 2000 and 2008.
3360D) Uruguayʹs economy was entered a recession in 2008.
3361Answer: A
3362Topic: Business Cycle
3363Skill: Analytical
3364Question history: Previous edition, Chapter 4
3365AACSB: Analytical Skills
3366Copyright © 2012 Pearson Education, Inc.
3367572   Parkin · Macroeconomics, Tenth Edition
336820) The following data show Uruguayʹs GDP using purchasing power parity in billions of dollars.
3369Year          2000   2001   2002   2003   2004   2005   2006   2007  2008
3370GDP($)      26.1     25.8   23.3    24.3    27.9   30.1    33.9    37.2    40.2
3371Using the data, we can conclude that
3372A) the standard of living did not change in Uruguay between 2000 and 2008.
3373B) Uruguay entered a recession in 2001.
3374C) potential GDP decreased in 2001.
3375D) Uruguayʹs economy reached a peak in 2005.
3376Answer: B
3377Topic: Business Cycle
3378Skill: Analytical
3379Question history: Previous edition, Chapter 4
3380AACSB: Analytical Skills
338121) The following data show Uruguayʹs GDP using purchasing power parity in billions of dollars.
3382Year          2000   2001   2002   2003   2004   2005   2006   2007  2008
3383GDP($)      26.1     25.8   23.3    24.3    27.9   30.1    33.9    37.2    40.2
3384Using the data, we can conclude that
3385A) Uruguayʹs economy entered a recession in 2005.
3386B) Uruguayʹs standard of living increased steadily between 2000 and 2008.
3387C) potential GDP more than doubled between 2000 and 2008.
3388D) Uruguayʹs economy reached a trough in 2002.
3389Answer: D
3390Topic: Business Cycle
3391Skill: Analytical
3392Question history: Previous edition, Chapter 4
3393AACSB: Analytical Skills
33945  Essay Questions
33951) Define and discuss GDP.
3396Answer: GDP is the market value of all final goods and services produced within a country in a
3397given time period. Only final goods and services are included. Goods produced as
3398intermediate goods are excluded. The goods and services must be produced within the
3399time period under consideration and so sales of used goods are excluded. The goods and
3400services also are those produced within the country, so production by the countryʹs firms
3401that takes place in a foreign nation is not included.
3402Topic: Gross Domestic Product
3403Skill: Recognition
3404Question history: Previous edition, Chapter 4
3405AACSB: Communication
3406Copyright © 2012 Pearson Education, Inc.
3407Chapter 4   Measuring GDP and Economic Growth   573
34082) How does the production of a U.S. firm located in France affect U.S. GDP? How does the
3409production of a French firm located in Ohio affect U.S. GDP?
3410Answer: U.S. GDP includes all production in the United States, regardless of who owns the factors
3411of production used. Therefore, the production by the U.S. firm in France wonʹt be counted
3412in U.S. GDP because the production does not take place in the United States. However,
3413the production by the French firm in the United States will be counted as part of U.S.
3414GDP because the production has taken place in the United States.
3415Topic: Gross Domestic Product
3416Skill: Conceptual
3417Question history: Previous edition, Chapter 4
3418AACSB: Communication
34193) Why are only final goods and services included in measuring GDP? Give examples to complete
3420your answer.
3421Answer: We purposely leave intermediate goods or services out of our calculation of GDP so we
3422donʹt double count. Examples of this are not counting the tires produced by Firestone that
3423are then sold to Ford to be placed on their new cars. If we counted the tires when they
3424were produced by Firestone and then also counted them when they were part of the Ford,
3425we would be double counting them.
3426Topic: Final Good
3427Skill: Conceptual
3428Question history: Previous edition, Chapter 4
3429AACSB: Reflective Thinking
34304) Is every product produced in the United States included in U.S. gross domestic product?
3431Answer: No, not every product produced is included in U.S. GDP. For instance, goods produced
3432as intermediate goods are excluded. Only final goods and services are included. In
3433addition, GDP counts only goods traded in markets, so goods and services that people
3434produce for their own use are excluded.
3435Topic: Final Good
3436Skill: Conceptual
3437Question history: Previous edition, Chapter 4
3438AACSB: Reflective Thinking
34395) Define and distinguish between final goods and intermediate goods.
3440Answer: Final goods are those goods that are purchased by their final user. Essentially, these
3441goods (and services) have been completed and do not need to go through further
3442processes of completion. Examples of final goods include restaurant meals, lamps,
3443railroad engines, and books. Intermediate goods and services are goods or services
3444produced by one firm, bought by another, and then used as a component in the
3445manufacture of another good or service. Basically, intermediate goods and services are
3446used as a part of another good or service. Lumber used by a carpenter to build a table or
3447paper used by a publisher to publish a book are examples of intermediate goods.
3448Topic: Intermediate Goods and Services
3449Skill: Conceptual
3450Question history: Previous edition, Chapter 4
3451AACSB: Reflective Thinking
3452Copyright © 2012 Pearson Education, Inc.
3453574   Parkin · Macroeconomics, Tenth Edition
34546) Neither intermediate goods nor used goods are included in GDP. Explain why these
3455expenditures are not included in GDP.
3456Answer: Intermediate goods and used goods are not included in the measurement of GDP because
3457they do not represent final expenditures on goods and services produced within the
3458relevant time period. Intermediate goods are inputs used in the production of final goods
3459and services. To count them twice would be double counting and inflate the level of GDP.
3460Used goods already have been counted in GDP during the year in which they were
3461produced. They were not produced in the current time period and therefore are not
3462included in GDP.
3463Topic: Intermediate Goods and Used Goods
3464Skill: Conceptual
3465Question history: Previous edition, Chapter 4
3466AACSB: Reflective Thinking
34677) What are the categories of total expenditure?
3468Answer: There are four categories: Consumption expenditure, spending by households;
3469investment, spending by firms to buy new capital equipment or add to inventories;
3470government expenditures on goods and services, spending by all levels of the
3471government to buy goods and services; and net exports of goods and services, which
3472equals the exports of goods and services minus the imports of goods and services.
3473Topic: Total Expenditure
3474Skill: Recognition
3475Question history: Previous edition, Chapter 4
3476AACSB: Reflective Thinking
34778) How do firms and households interact within the context of the circular flow model?
3478Answer: Households are the owners of the factors of production. Firms purchase these factors in
3479the factor market. They use these factors to produce goods and services which are sold to
3480households in the goods market. Households are paid for the services of the factors of
3481production and use this income to pay for the goods and services.
3482Topic: Circular Flow
3483Skill: Conceptual
3484Question history: Previous edition, Chapter 4
3485AACSB: Reflective Thinking
34869) What is the relationship shown by the circular flow among income, total expenditure, and GDP?
3487Answer: They are all equal. The value of production, which is GDP, equals income because firms
3488pay factors (as income) all the revenue they receive from selling the goods and services
3489they produce (GDP). Next, the revenue that firms receive from selling the goods and
3490services they produce (GDP) is equal to what is spent as expenditures on the goods and
3491services. (total expenditure).
3492Topic: Circular Flow
3493Skill: Conceptual
3494Question history: Previous edition, Chapter 4
3495AACSB: Reflective Thinking
3496Copyright © 2012 Pearson Education, Inc.
3497Chapter 4   Measuring GDP and Economic Growth   575
349810) Use the idea of the circular flow diagram to explain why the value of production equals total
3499income equals total expenditure.
3500Answer: The basic point is that nothing escapes the system. Firms receive the value of their
3501production in the form of revenue. With this revenue, they pay for the factors of
3502production they hire and what is left over after paying their costs is profit, which is paid
3503to the households that own the firms. Thus the value of production equals total income.
3504These incomes flow from firms to households. Households then allocate their income to
3505taxes, saving, and consumption. Taxes are collected and spent by the government. Saving
3506by households is spent as investment by firms after being cycled through the banking
3507system. Thus total expenditure equals the value of total income, which equals the value of
3508production by firms.
3509Topic: Circular Flow
3510Skill: Conceptual
3511Question history: Previous edition, Chapter 4
3512AACSB: Communication
351311) What is the distinction between gross investment and net investment?
3514Answer: Gross investment is the total spending on capital goods. Net investment equals gross
3515investment minus depreciation. From one year to the next, the capital stock increases by
3516the amount of net investment.
3517Topic: Capital and Investment
3518Skill: Recognition
3519Question history: Previous edition, Chapter 4
3520AACSB: Reflective Thinking
352112) Explain how gross investment, depreciation, net investment, and the capital stock are related.
3522Answer: The change in the capital stock equals net investment and net investment equals gross
3523investment minus depreciation.
3524Topic: Capital and Investment
3525Skill: Conceptual
3526Question history: Previous edition, Chapter 4
3527AACSB: Reflective Thinking
352813) What is the relationship between gross investment, net investment, and depreciation? Which
3529measures the change in the capital stock?
3530Answer: Gross investment minus depreciation equals net investment. Gross investment is all the
3531investment made during the year. Depreciation is the wear and tear on capital from its
3532use and obsolescence. The ʺdepreciation partʺ of gross investment goes to replace old,
3533worn out capital and so net investment is the change in the capital stock.
3534Topic: Capital and Investment
3535Skill: Conceptual
3536Question history: Previous edition, Chapter 4
3537AACSB: Reflective Thinking
3538Copyright © 2012 Pearson Education, Inc.
3539576   Parkin · Macroeconomics, Tenth Edition
354014) Explain the relationship among the capital stock, gross investment, net investment, and
3541depreciation.
3542Answer: The capital stock is the total quantity of plant, equipment, buildings and inventories.
3543Some of this capital stock is always depreciating or wearing out. During a year a firm will
3544purchase new capital. The amount of capital purchased is gross investment. The amount
3545of gross investment minus the amount of depreciation during a year is net investment. So
3546net investment is the change in the capital stock from one period to the next.
3547Topic: Capital Stock and Investment
3548Skill: Conceptual
3549Question history: Previous edition, Chapter 4
3550AACSB: Reflective Thinking
355115) Explain the difference between the capital stock, gross investment, depreciation, and net
3552investment.
3553Answer: The capital stock is the total quantity of plant, equipment, buildings, and inventories.
3554Gross investment is the purchase of new capital. Depreciation is the wearing out and
3555scrapping of capital. Net investment equals gross investment minus depreciation. The
3556change in the capital stock from one period to the next equals net investment.
3557Topic: Capital and Investment
3558Skill: Conceptual
3559Question history: Previous edition, Chapter 4
3560AACSB: Reflective Thinking
356116) Define gross investment and net investment. Discuss the relationship between gross investment
3562and net investment.
3563Answer: Gross investment is the total amount spent on new capital goods to increase the quantity
3564of capital and replace the depreciated capital. Net investment is the amount spent on new
3565capital that exceeds the value of the depreciated capital or, in other words, net investment
3566equals gross investment minus depreciation. Net investment is equal to the change in the
3567capital stock.
3568Topic: Investment
3569Skill: Recognition
3570Question history: Previous edition, Chapter 4
3571AACSB: Reflective Thinking
357217) ʺWhen a companyʹs depreciation is larger than its gross investment, net investment becomes
3573negative and the firmʹs capital stock decreases.ʺ Is the previous statement correct or incorrect?
3574Explain your answer.
3575Answer: The statement is correct. Net investment equals gross investment minus depreciation. If
3576depreciation is larger than gross investment, net investment will be negative. Net
3577investment is the change in the capital stock, and so the companyʹs capital stock
3578decreases. Essentially, because depreciation is larger than the companyʹs gross
3579investment, the company is not buying enough capital to replace the capital that
3580depreciated. As a result, the total amount of the companyʹs capital decreases.
3581Topic: Investment
3582Skill: Conceptual
3583Question history: Previous edition, Chapter 4
3584AACSB: Reflective Thinking
3585Copyright © 2012 Pearson Education, Inc.
3586Chapter 4   Measuring GDP and Economic Growth   577
358718) Investment, as included in GDP, consists of what?
3588Answer: Investment is the purchase of new capital goods such as tools, instruments, machines,
3589buildings, and additions to inventories. Investment does not include the purchase or sale
3590of stocks and bonds.
3591Topic: Investment
3592Skill: Recognition
3593Question history: Modified 10th edition
3594AACSB: Reflective Thinking
359519) How are changes in inventory treated in GDP?
3596Answer: Changes in inventory are part of the investment component of GDP. So, if Dell produces
3597100,000 computers this year and sells 95,000, the 5,000 unsold computers that are added
3598to Dellʹs inventory are part of the investment component of GDP for this year.
3599Topic: Expenditure Approach, Investment
3600Skill: Conceptual
3601Question history: Previous edition, Chapter 4
3602AACSB: Reflective Thinking
360320) ʺTo calculate GDP, economists begin with total income earned and then subtract total
3604expenditure by the four sectors of the economy.ʺ Is the previous sentence true or false? Explain
3605your answer.
3606Answer: The sentence is false. To calculate GDP, economists can begin with total income and then
3607make a few adjustments but they do not subtract total expenditure. Alternatively,
3608economists can sum total expenditure by the economyʹs four sectors, but this summation
3609is GDP.
3610Topic: Measuring GDP
3611Skill: Conceptual
3612Question history: Previous edition, Chapter 4
3613AACSB: Reflective Thinking
361421) List the components of the expenditure approach to measuring GDP.
3615Answer: The expenditure approach measures GDP by adding final expenditures, so the
3616components are personal consumption expenditure, gross private investment,
3617government expenditures on goods and services, and net exports.
3618Topic: Expenditure Approach
3619Skill: Recognition
3620Question history: Previous edition, Chapter 4
3621AACSB: Reflective Thinking
3622Copyright © 2012 Pearson Education, Inc.
3623578   Parkin · Macroeconomics, Tenth Edition
362422) List and compare the four components of the expenditure approach to calculating GDP.
3625Answer: The 4 parts can be summarized according to the formula GDP = C + I + G + (X - M). The
3626first part, C, is consumption expenditure, which measures household spending and is the
3627largest component accounting for around 70 percent of GDP. The next category, I, is
3628investment and refers to the purchase of new capital, the purchase of new homes and
3629changes in inventories. This fluctuates a great deal but generally accounts for 15 to 20
3630percent of GDP. Next is G, which government expenditure on goods and services. This
3631component includes purchases by all levels of government on new goods and services
3632and is about 20 percent of GDP. The final category, (X - M), is net exports. In it, exports
3633are added and imports are subtracted. This component is typically negative in the United
3634States because we typically run a trade deficit. It is generally around -1 to -5 percent or so
3635of GDP.
3636Topic: Expenditure Approach to GDP
3637Skill: Conceptual
3638Question history: Previous edition, Chapter 4
3639AACSB: Reflective Thinking
364023) Explain how GDP is measured according to the expenditure and income approaches.
3641Answer: GDP is measured using the expenditure approach and the income approach. The
3642expenditure approach uses the streams of spending and adds together the total
3643expenditure, or spending, on final goods and services. Thus the expenditure approach
3644calculates the sum of consumption expenditure, investment, government expenditure on
3645goods and services, and net exports. The income approach uses another of the circular
3646flows to calculate GDP. The income approach adds together all sources of income and
3647then incorporates a few additional adjustments. Thus the income approach calculates the
3648sum of compensation of employees, net interest, rental income of persons, corporate
3649profits, and proprietorsʹ income. The sum is ʺnet domestic product at factor cost.ʺ To
3650change this sum to GDP, which is calculated at market prices rather than factor costs, and
3651which is the gross product rather than net product, indirect taxes are added and subsidies
3652subtracted and then depreciation is added. Any statistical discrepancy is added to (or
3653subtracted from) GDP calculated using the income approach.
3654Topic: Expenditure Approach and Income Approach
3655Skill: Conceptual
3656Question history: Modified 10th edition
3657AACSB: Communication
365824) How does the income approach measure GDP?
3659Answer: The incomes approach adds the compensation of employees, net interest, rental income,
3660corporate profits and proprietorsʹ income to give net domestic income at factor cost. Then
3661indirect taxes and depreciation are added. Finally, subsidies are subtracted to obtain
3662GDP.
3663Topic: Income Approach
3664Skill: Recognition
3665Question history: Previous edition, Chapter 4
3666AACSB: Reflective Thinking
3667Copyright © 2012 Pearson Education, Inc.
3668Chapter 4   Measuring GDP and Economic Growth   579
366925) What must be done to net domestic product at factor cost in order to transform it to gross
3670domestic product? Explain why these adjustments are necessary.
3671Answer: Several adjustments must be made to net domestic product at factor cost in order to set it
3672equal to GDP. First, indirect taxes must be added and subsidies must be subtracted. These
3673changes are necessary because GDP is measured using market prices whereas net
3674domestic product at factor cost measures what the goods and services cost to produce.
3675The price can be different than the cost when there are taxes and subsidies present. Thus
3676taxes must be added to the cost and subsidies subtracted in order to determine the price
3677that was actually paid. (For instance, a DVD might cost $20 but a $1 sales tax makes the
3678price $21.) Then, the second adjustment is that depreciation also needs to be added.
3679Depreciation is the wear and tear on capital when it is used and when it becomes
3680obsolete. GDP includes expenditure on investment and some investment is used to
3681replace the capital stock that has depreciated. So, when calculating GDP using the income
3682approach, depreciation must be included. But depreciation is not included in net domestic
3683product at factor cost because that amount includes only payments made (as income) to
3684the inputs that helped produce the products and no payment is made for the depreciation
3685of capital. So the addition of depreciation (as well as the adjustments for taxes and
3686subsidies) is necessary in order to convert net domestic product at factor cost into GDP.
3687Topic: Income Approach, Adjustments
3688Skill: Recognition
3689Question history: Previous edition, Chapter 4
3690AACSB: Reflective Thinking
369126) Several adjustments must be made to net domestic product at factor cost in order to calculate
3692GDP. One of these adjustments is adding depreciation. What is depreciation and why must it be
3693added?
3694Answer: Depreciation is the wear and tear of capital when it is used and when it becomes obsolete.
3695GDP includes expenditure on investment and some investment is used to replace the
3696capital stock that has depreciated. So, when calculating GDP using the income approach,
3697depreciation must be included. But depreciation is not included in net domestic product
3698at factor cost because that includes only payments made (as income) to the inputs that
3699helped produce the products and no payment is made for the depreciation of capital.
3700Hence depreciation must be added to net domestic product at factor cost in order to
3701calculate GDP.
3702Topic: Income Approach, Depreciation
3703Skill: Recognition
3704Question history: Previous edition, Chapter 4
3705AACSB: Reflective Thinking
3706Copyright © 2012 Pearson Education, Inc.
3707580   Parkin · Macroeconomics, Tenth Edition
370827) What is the difference between real and nominal GDP and why do economists make this
3709distinction?
3710Answer: Real GDP is a measure of the final goods and services produced in a year valued at
3711constant prices. Nominal GDP is the final goods and services produced in a year valued
3712at the prices that existed during the year. Economists make the distinction between real
3713GDP and nominal GDP because nominal GDP changes for two reasons: When the
3714production of goods and services changes and when the prices of the goods and services
3715change. Economists want to be able to distinguish between changes brought about by
3716production changes and changes brought about by price changes. Real GDP allows
3717economists to make this distinction. In particular, by using prices that are constant, a
3718change in real GDP represents a change in the production of goods and services and
3719factors out the change in prices. Thus real GDP removes the effect from changes in prices
3720and thereby reveals the change in the underlying production of goods and services.
3721Topic: Real and Nominal GDP
3722Skill: Conceptual
3723Question history: Previous edition, Chapter 4
3724AACSB: Analytical Skills
372528) Is it possible for nominal GDP to increase while real GDP does not change?
3726Answer: Yes, it is possible for nominal GDP to increase while real GDP does not change. Nominal
3727GDP changes if either prices or production change, while real GDP changes only if
3728production changes. If production does not change while the prices of the goods and
3729services increase, real GDP does not change while nominal GDP increases.
3730Topic: Real and Nominal GDP
3731Skill: Conceptual
3732Question history: Previous edition, Chapter 4
3733AACSB: Analytical Skills
373429) Can nominal GDP ever be less than real GDP?
3735Answer: Yes, nominal GDP can be less than real GDP. If prices generally fall from one period to
3736the next, then nominal GDP is less than real GDP. However, in the U.S. economy, because
3737prices generally rise, nominal GDP typically is greater than real GDP (except in the base
3738period.) But, there is no economic law that states that prices must generally rise and so
3739there is no necessity for nominal GDP to be larger than real GDP.
3740Topic: Real and Nominal GDP
3741Skill: Conceptual
3742Question history: Previous edition, Chapter 4
3743AACSB: Analytical Skills
374430) What is the relationship between actual and potential real GDP?
3745Answer: Real GDP equals potential GDP when all resources are fully employed and there are no
3746shortages that lead to inflation. Real GDP can be greater than potential GDP and can be
3747less than potential GDP. During a business cycle, real GDP cycles around potential GDP.
3748During an expansion, real GDP rises above potential GDP and during a recession real
3749GDP falls below potential GDP.
3750Topic: Actual and Potential GDP
3751Skill: Recognition
3752Question history: Modified 10th edition
3753AACSB: Reflective Thinking
3754Copyright © 2012 Pearson Education, Inc.
3755Chapter 4   Measuring GDP and Economic Growth   581
375631) Explain the relationship between real GDP and potential GDP during the two phases of the
3757business cycle.
3758Answer: During an expansion the level of real GDP eventually surpasses potential GDP, reaches a
3759peak and subsequently falls below potential GDP during a recession eventually reaching
3760a trough.
3761Topic: Actual and Potential GDP
3762Skill: Conceptual
3763Question history: Previous edition, Chapter 4
3764AACSB: Reflective Thinking
376532) Explain the relationship between potential GDP and real GDP in the United States since the
3766early 1960s. You do not need to tell what happened during any specific year; just describe the
3767general relationship.
3768Answer: Potential GDP has grown over the period, albeit at a slower rate over the past 3 decades,
3769while the level of real GDP has fluctuated around potential GDP throughout.
3770Topic: Actual and Potential GDP
3771Skill: Conceptual
3772Question history: Previous edition, Chapter 4
3773AACSB: Reflective Thinking
377433) What is a business cycle?
3775Answer: The business cycle is the recurrent but irregular upward and downward movements in
3776production and jobs. A downward movement is called a recession and an upward
3777movement is called an expansion. At the top of the cycle, when an expansion gives way
3778to a recession, is a peak. At the bottom of the cycle, when a recession gives way to an
3779expansion, is a trough.
3780Topic: Business Cycle
3781Skill: Recognition
3782Question history: Previous edition, Chapter 4
3783AACSB: Reflective Thinking
378434) List and explain the two phases and two turning points of the business cycle.
3785Answer: The economy is defined as being an expansion when real GDP is increasing and in a
3786recession when real GDP decreases for at least two consecutive quarters. Between
3787expansion and recession the economy reaches a peak defined as a local maximum in the
3788level of real GDP. A trough is the opposite of a peak where real GDP hits a local
3789minimum as the economy goes from being in a recession to being in an expansion.
3790Topic: Business Cycle
3791Skill: Conceptual
3792Question history: Previous edition, Chapter 4
3793AACSB: Reflective Thinking
379435) What is a recession?
3795Answer: A recession is a period of time during which real GDP decreases, so that the growth rate
3796of real GDP is negative, for at least two successive quarters. A recession occurs starts after
3797a peak in the business cycle and ends before a trough in the business cycle. During a
3798recession, real GDP falls below potential GDP.
3799Topic: Business Cycle
3800Skill: Recognition
3801Question history: Previous edition, Chapter 4
3802AACSB: Reflective Thinking
3803Copyright © 2012 Pearson Education, Inc.
3804582   Parkin · Macroeconomics, Tenth Edition
380536) Explain the business cycle by describing the phases and turning points.
3806Answer: The business cycle has two phases, the expansion where GDP is increasing and the
3807recession where GDP is declining for at least two consecutive quarters. There are two
3808turning points, the peak, where an expansion ends and a recession begins, and the
3809trough, where a recession ends and an expansion begins.
3810Topic: Business Cycle
3811Skill: Recognition
3812Question history: Previous edition, Chapter 4
3813AACSB: Reflective Thinking
381437) Why does real GDP have limitations in determining economic welfare?
3815Answer: First economic welfare is a broad concept of economic well-being that entails all goods
3816and services not just those measured by GDP. These include production in the home and
3817within the underground economy. Secondly, items such as good health, long life
3818expectancy and leisure time are all aspects that are highly desirable and count for
3819economic welfare yet are not measured by GDP. Lastly, environmental quality is highly
3820desired yet real GDP growth could actually reduce the quality of the environment. So for
3821all these reasons, economic growth is not totally determined by real GDP.
3822Topic: Economic Welfare Comparisons
3823Skill: Conceptual
3824Question history: Previous edition, Chapter 4
3825AACSB: Reflective Thinking
382638) Explain how our economic welfare depends upon our level of real GDP per person but there
3827might not be a one-to-one relationship between economic welfare and real GDP per person.
3828Give examples of things that can effect one but not the other.
3829Answer: Although GDP has a significant impact on our economic welfare, it is not a perfect
3830measure of economic welfare. GDP omits some factors that affect our economic welfare.
3831GDP does not include household production, all the tasks performed around the house. It
3832omits underground production, the part of the economy hidden from the government.
3833Real GDP does not include the value of peopleʹs leisure time. And, GDP does not make
3834allowances for environmental quality, health and life expectancy, or political freedom and
3835social justice. All of these factors influence the quality of our life and hence our economic
3836welfare. Indeed, occasionally a change will affect GDP and economic welfare in different
3837directions. For instance, if people decide they want more leisure and hence retire early,
3838GDP will decrease because fewer people are working, but economic welfare will increase.
3839Or, if there is an increase in production that creates massive amounts of pollution, GDP
3840increases even though economic welfare likely decreases.
3841Topic: Economic Welfare Comparisons
3842Skill: Conceptual
3843Question history: Previous edition, Chapter 4
3844AACSB: Communication
3845Copyright © 2012 Pearson Education, Inc.
3846Chapter 4   Measuring GDP and Economic Growth   583
384739) ʺIf country A has a higher level of real GDP per person than country B, then people in Country
3848A must enjoy a higher standard of economic welfare than people in Country B.ʺ Is this statement
3849true or false and explain your answer.
3850Answer: The statement is false. Factors other than real GDP per person affect economic welfare.
3851For instance, factors such as household production, underground production, leisure
3852time, and environmental quality all affect economic welfare and all are omitted from real
3853GDP per person. In addition, economic welfare is influenced by health and life
3854expectancy as well as by the nationʹs political freedom and social justice, none of which is
3855measured by real GDP per person. Although real GDP per person is an important factor
3856in determining a countryʹs economic welfare, it is not the only factor.
3857Topic: Economic Welfare Comparisons
3858Skill: Conceptual
3859Question history: Previous edition, Chapter 4
3860AACSB: Communication
386140) List and discuss various types of goods and services omitted from measured GDP.
3862Answer: Household production, such as preparing meals and taking care of children, are
3863productive activities but do not involve market transactions. Therefore, household
3864production is omitted as part of GDP. Underground production, such as working for cash
3865to avoid taxes or engaging in illegal activities, are not reported to the government and
3866hence are not counted as part of GDP. Leisure time and preserving and improving the
3867natural environment are not production per se but are clearly economic goods. They are
3868not counted as part of GDP because it is hard to quantify and put a monetary value on
3869them.
3870Topic: Omissions from GDP
3871Skill: Conceptual
3872Question history: Previous edition, Chapter 4
3873AACSB: Communication
387441) What would happen to measured GDP if more people started hiring workers to do house chores
3875such as cooking and cleaning?
3876Answer: GDP is the value of the final goods and services that are produced in an economy over a
3877specified time period. However, GDP, as measured, does not include the value of
3878household production people do for themselves around their homes. Therefore if you
3879wash your car at your home or apartment, the value of the car washing is not included in
3880GDP. However if you hired someone to wash your car at your home or apartment, the
3881value of the car washing would be included in GDP. Thus if more people started hiring
3882workers to do household chores, measured GDP would increase.
3883Topic: Household Production
3884Skill: Conceptual
3885Question history: Previous edition, Chapter 4
3886AACSB: Communication
3887Copyright © 2012 Pearson Education, Inc.
3888584   Parkin · Macroeconomics, Tenth Edition
388942) What is ʺunderground productionʺ? Is it included in GDP?
3890Answer: Underground production is the production of goods and services that remain hidden
3891from the government. Underground production includes the production of illegal goods
3892and services and the production of legal goods and services but in a way that avoids
3893taxes or regulations. Underground production is not included in GDP.
3894Topic: GDP and Underground Economic Activity
3895Skill: Recognition
3896Question history: Previous edition, Chapter 4
3897AACSB: Reflective Thinking
389843) Explain how underground economic activity affects measurement of GDP.
3899Answer: The underground economy are transactions hidden from the government, either because
3900they are illegal or to avoid taxes. Because the underground economy is hidden from the
3901government, it is not included in GDP and so GDP is smaller than it otherwise would be.
3902Topic: GDP and Underground Economic Activity
3903Skill: Conceptual
3904Question history: Previous edition, Chapter 4
3905AACSB: Reflective Thinking
390644) While studying with your friend, your friend states, ʺOur leisure time increases GDP but lowers
3907our economic welfare because it reduces the amount of goods and services we can consume.ʺ Is
3908your friendʹs statement correct?
3909Answer: Your friendʹs assertion is incorrect on two counts. First, leisure time does not increase
3910GDP. Indeed, by taking time away from production, leisure time decreases GDP. Second,
3911leisure time increases our economic welfare. People enjoy their leisure time and therefore
3912having more leisure time raises their economic welfare.
3913Topic: GDP and Leisure Time
3914Skill: Conceptual
3915Question history: Previous edition, Chapter 4
3916AACSB: Reflective Thinking
391745) If you buy a new water skis and other new equipment for $2,500 and take a week off of your
3918job, where you earn $1,000 a week, to go water skiing. The equipment you purchased was all
3919produced in the United States. You think that the week was worth $4,000. As a result of your
3920vacation, GDP changes by how much?
3921Answer: GDP changes by only the $2,500 you spent on the water skis and other equipment.
3922Topic: GDP and Leisure Time
3923Skill: Conceptual
3924Question history: Previous edition, Chapter 4
3925AACSB: Reflective Thinking
3926Copyright © 2012 Pearson Education, Inc.
3927Chapter 4   Measuring GDP and Economic Growth   585
39286  Numeric and Graphing Questions
39291) Assume a small nation has the following statistics: its consumption expenditure is $15 million,
3930investment is $2 million, government purchases of goods and services is $1 million, exports of
3931goods and services to foreigners is $1 million, and imports of goods and services from foreigners
3932is $1.5 million. Calculate this nationʹs GDP.
3933Answer: The nationʹs GDP equals the sum of consumption expenditure, investment, government
3934purchases of goods and services, and net exports of goods and services, where net
3935exports of goods and services equals of goods and services exports minus imports of
3936goods and services. So, GDP = $15 million + $2 million + $1 million + $1 million - $1.5
3937million = $17.5 million.
3938Topic: Expenditure Approach
3939Skill: Analytical
3940Question history: Previous edition, Chapter 4
3941AACSB: Analytical Skills
3942Item Billions of
3943dollars
3944Consumption expenditure 6,258
3945Investment 1,623
3946Government expenditure on
3947goods and services 1,630
3948Exports of goods and services 998
3949Imports of goods and services 1,252
39502) The table above gives the values of different expenditures in the United States during 1999.
3951Answer the following questions about the United States.
3952a) What was the value of net exports of goods and services in 1999?
3953b) What was (nominal) GDP equal to in 1999?
3954c) What was the (nominal) value of total production equal to in 1999?
3955Answer: a) Net exports of goods and services equals the value of exports of goods and services,
3956$998 billion, minus the value of imports of goods and services, $1,252 billion, or -$254
3957billion.
3958b) GDP equals the sum of consumption expenditure, $6,258, plus investment, $1,623,
3959plus government expenditure on goods and services, $1,630, plus net exports, -$254, or
3960$9,257 billion.
3961c) The value of total production equals the value of GDP, so total production was $9,257
3962billion in 1999.
3963Topic: Expenditure Approach
3964Skill: Analytical
3965Question history: Previous edition, Chapter 4
3966AACSB: Analytical Skills
3967Copyright © 2012 Pearson Education, Inc.
3968586   Parkin · Macroeconomics, Tenth Edition
39693) On January 1, 2010, United Delivery had trucks valued at $1.3 million. During 2010, United
3970Delivery purchased new trucks valued at $500,000. If the value of the trucks on December 31,
39712010 was $1.5 million, what is the amount of its net investment and its depreciation during
39722010?
3973Answer: Net investment is the change in the capital stock from one period to the next. For United
3974Delivery, net investment equals $1.5 million - $1.3 million = $200,000. Net investment
3975also equals gross investment minus depreciation, so depreciation equals gross investment
3976minus net investment. Gross investment, the total amount spent on new capital
3977equipment, was $500,000. Net investment was calculated to be $200,000. Therefore
3978depreciation equals $500,000 - $200,000 = $300,000.
3979Topic: Capital Stock and Investment
3980Skill: Analytical
3981Question history: Modified 10th edition
3982AACSB: Analytical Skills
39834) Using a graph, draw and label the phases and turning points of the business cycle.
3984Answer:
3985The figure shows a business cycle.
3986Topic: Business Cycle
3987Skill: Recognition
3988Question history: Previous edition, Chapter 4
3989AACSB: Analytical Skills
39907  True or False
39911) When IBM, an American firm, produces computer chips in another country, this production is
3992not included in U.S. GDP because the production did not take place in the United States.
3993Answer: TRUE
3994Topic: Gross Domestic Product
3995Skill: Conceptual
3996Question history: Previous edition, Chapter 4
3997AACSB: Reflective Thinking
3998Copyright © 2012 Pearson Education, Inc.
3999Chapter 4   Measuring GDP and Economic Growth   587
40002) The circular flow diagram shows that the flow of payments to the factors used to produce goods
4001and services exceeds the flow of payments for final goods and services.
4002Answer: FALSE
4003Topic: Circular Flow
4004Skill: Conceptual
4005Question history: Previous edition, Chapter 4
4006AACSB: Reflective Thinking
40073) The circular flow diagram shows only the aggregate expenditures measure of GDP.
4008Answer: FALSE
4009Topic: Circular Flow, Aggregate Expenditures
4010Skill: Conceptual
4011Question history: Previous edition, Chapter 4
4012AACSB: Reflective Thinking
40134) The circular flow shows that aggregate spending is larger than aggregate income because
4014people save.
4015Answer: FALSE
4016Topic: Expenditure Equals Income
4017Skill: Conceptual
4018Question history: Modified 10th edition
4019AACSB: Reflective Thinking
40205) When gross investment is greater than depreciation, then the nationʹs capital stock increased.
4021Answer: TRUE
4022Topic: Capital and Investment
4023Skill: Analytical
4024Question history: Previous edition, Chapter 4
4025AACSB: Reflective Thinking
40266) Net investment equals gross investment minus depreciation.
4027Answer: TRUE
4028Topic: Net Investment
4029Skill: Recognition
4030Question history: Previous edition, Chapter 4
4031AACSB: Reflective Thinking
40327) If depreciation exceeds gross investment, net investment is negative.
4033Answer: TRUE
4034Topic: Net Investment
4035Skill: Conceptual
4036Question history: Previous edition, Chapter 4
4037AACSB: Reflective Thinking
40388) The expenditure approach to measuring GDP includes firmsʹ spending on wages.
4039Answer: FALSE
4040Topic: Expenditure Approach
4041Skill: Recognition
4042Question history: Previous edition, Chapter 4
4043AACSB: Reflective Thinking
4044Copyright © 2012 Pearson Education, Inc.
4045588   Parkin · Macroeconomics, Tenth Edition
40469) Intermediate goods and services are one of the largest components of the expenditure approach
4047to measuring GDP.
4048Answer: FALSE
4049Topic: Expenditure Approach
4050Skill: Recognition
4051Question history: Previous edition, Chapter 4
4052AACSB: Reflective Thinking
405310) To calculate GDP using the expenditure approach, in part it is necessary to add exports and
4054subtract imports.
4055Answer: TRUE
4056Topic: Expenditure Approach, Net Exports
4057Skill: Recognition
4058Question history: Previous edition, Chapter 4
4059AACSB: Reflective Thinking
406011) To calculate GDP when using the income approach, you must add indirect business taxes and
4061depreciation.
4062Answer: TRUE
4063Topic: Income Approach
4064Skill: Conceptual
4065Question history: Previous edition, Chapter 4
4066AACSB: Reflective Thinking
406712) The largest component of income is proprietorsʹ income.
4068Answer: FALSE
4069Topic: Income Approach, Compensation of Employees
4070Skill: Recognition
4071Question history: Previous edition, Chapter 4
4072AACSB: Reflective Thinking
407313) A productivity growth slowdown can be shown as year-to-year fluctuations of real GDP
4074around potential GDP.
4075Answer: FALSE
4076Topic: Productivity Growth Slowdown
4077Skill: Conceptual
4078Question history: Previous edition, Chapter 4
4079AACSB: Reflective Thinking
408014) Real GDP fluctuates from year to year but is always below potential GDP.
4081Answer: FALSE
4082Topic: Real and Potential GDP
4083Skill: Recognition
4084Question history: Previous edition, Chapter 4
4085AACSB: Reflective Thinking
4086Copyright © 2012 Pearson Education, Inc.
4087Chapter 4   Measuring GDP and Economic Growth   589
408815) A business cycle is the pattern of short-run upward and downward movements in production
4089and jobs.
4090Answer: TRUE
4091Topic: Business Cycle
4092Skill: Recognition
4093Question history: Previous edition, Chapter 4
4094AACSB: Reflective Thinking
409516) Phases and turning points of the business cycle are expansion, peak, recession and trough.
4096Answer: TRUE
4097Topic: Business Cycle
4098Skill: Recognition
4099Question history: Previous edition, Chapter 4
4100AACSB: Reflective Thinking
410117) The business cycle progresses from an expansion to a peak to a recession and then to a trough.
4102Answer: TRUE
4103Topic: Business Cycle
4104Skill: Recognition
4105Question history: Previous edition, Chapter 4
4106AACSB: Reflective Thinking
410718) A recession occurs when real GDP decreases for at least 6 months.
4108Answer: TRUE
4109Topic: Business Cycle
4110Skill: Recognition
4111Question history: Previous edition, Chapter 4
4112AACSB: Reflective Thinking
411319) An expansion ends when the economy hits a trough and then enters a recession.
4114Answer: FALSE
4115Topic: Business Cycle
4116Skill: Recognition
4117Question history: Previous edition, Chapter 4
4118AACSB: Reflective Thinking
411920) To measure economic welfare, one needs only to measure real GDP.
4120Answer: FALSE
4121Topic: Economic Welfare
4122Skill: Conceptual
4123Question history: Previous edition, Chapter 4
4124AACSB: Reflective Thinking
412521) The omission of household production causes actual economic production to be
4126underestimated.
4127Answer: TRUE
4128Topic: GDP and Household Production
4129Skill: Conceptual
4130Question history: Previous edition, Chapter 4
4131AACSB: Reflective Thinking
4132Copyright © 2012 Pearson Education, Inc.
4133590   Parkin · Macroeconomics, Tenth Edition
413422) Household production is not measured in the GDP.
4135Answer: TRUE
4136Topic: Household Production
4137Skill: Recognition
4138Question history: Previous edition, Chapter 4
4139AACSB: Reflective Thinking
414023) All economic activity in the underground economy represents the production of illegal goods
4141and services.
4142Answer: FALSE
4143Topic: GDP and Underground Economic Activity
4144Skill: Recognition
4145Question history: Previous edition, Chapter 4
4146AACSB: Reflective Thinking
414724) The underground economy means that GDP will overstate the actual level of economic welfare.
4148Answer: FALSE
4149Topic: GDP and Underground Economic Activity
4150Skill: Conceptual
4151Question history: Previous edition, Chapter 4
4152AACSB: Reflective Thinking
415325) If a measure of real GDP could include the value of leisure time, measured real GDP would
4154increase.
4155Answer: TRUE
4156Topic: GDP and Leisure Time
4157Skill: Conceptual
4158Question history: Previous edition, Chapter 4
4159AACSB: Reflective Thinking
416026) The fact that prices for similar goods differ across nations complicates comparisons of real GDP
4161across countries.
4162Answer: TRUE
4163Topic: GDP and Purchasing Power Parity Prices
4164Skill: Conceptual
4165Question history: Previous edition, Chapter 4
4166AACSB: Reflective Thinking
4167Copyright © 2012 Pearson Education, Inc.
4168Chapter 4   Measuring GDP and Economic Growth   591
41698  Extended Problems
4170Item
4171Amount
4172(millions of dollars)
4173Wages paid 100
4174Consumption expenditure 120
4175Taxes 40
4176Transfer payments 15
4177Profits 35
4178Investment 30
4179Government expenditure 50
4180Exports 30
4181Imports 40
41821) The table above shows the transaction in Pinkland last year:
4183a) Calculate Pinklandʹs GDP.
4184b) What approach did you use to make this calculation?
4185Answer: a) GDP = C + I + G + (X - M) = $120 + $30 + $50 + ($30 - $40) = $190 million.
4186b) The expenditure approach is used, which measures GDP as C + I + G + (X - M).
4187Topic: Expenditure Approach
4188Skill: Analytical
4189Question history: Previous edition, Chapter 4
4190AACSB: Analytical Skills
4191Year Real GDP
4192(trillions of yen)
41931991 478
41941992 483
41951993 484
41961994 489
41971995 499
41981996 516
41991997 525
42001998 519
42011999 520
42022000 534
42032001 536
42042) The table above shows Japanʹs real GDP between 1991 to 2001.
4205a) Draw a figure with Japanʹs real GDP from 1991 to 2001.
4206b) In the previous 30 years, the growth rate of Japanʹs potential GDP was 6 percent a year. On
4207your graph, show the path that potential GDP would have followed if its GDP in 1991 was equal
4208to potential GDP and the growth rate of potential GDP had been maintained in 1991 -2001.
4209c) Show the Lucas wedge on your figure.
4210Copyright © 2012 Pearson Education, Inc.
4211592   Parkin · Macroeconomics, Tenth Edition
4212Answer:
4213a) See the figure above.
4214b) Potential GDP is illustrated in the figure above. Potential GDP in 1991 is assumed to
4215equal real GDP in 1991. Then, projected GDP levels for subsequent years are calculated
4216by multiplying potential GDP in the previous year by 1.06. For example, in 1992,
4217potential GDP equals 478 trillion yen × 1.06 = 507 trillion yen; potential GDP in 1993
4218equals 507 trillion yen × 1.06 = 537 trillion yen; and so on.
4219c) The figure above shows the Lucas wedge as the darkened area. The Lucas wedge
4220shows that the loss of output accumulated in Japan in 1991 -2001 that resulted from a
4221slowdown in the growth rate of real GDP was 1,575 trillion yen.
4222Topic: Lucas Wedge
4223Skill: Analytical
4224Question history: Previous edition, Chapter 4
4225AACSB: Analytical Skills
42269  Appendix: Graphs in Macroeconomics
42271) To see how variables evolve over time we use
4228A) a scatter graph.
4229B) an evolution plot.
4230C) a cross-section plot.
4231D) a time-series graph.
4232Answer: D
4233Topic: Time-Series Graphs
4234Skill: Recognition
4235Question history: Previous edition, Chapter 1
4236AACSB: Analytical Skills
4237Copyright © 2012 Pearson Education, Inc.
4238Chapter 4   Measuring GDP and Economic Growth   593
42392) The figure above shows a
4240A) two-variable time-series graph.
4241B) time-series graph.
4242C) scatter diagram.
4243D) regression.
4244Answer: B
4245Topic: Time-Series Graphs
4246Skill: Recognition
4247Question history: Previous edition, Chapter 1
4248AACSB: Analytical Skills
42493) On a time-series graph, time is typically shown
4250A) as an area.
4251B) along the x-axis.
4252C) along the y-axis.
4253D) as an implicit variable held constant.
4254Answer: B
4255Topic: Time-Series Graphs
4256Skill: Recognition
4257Question history: Previous edition, Chapter 1
4258AACSB: Analytical Skills
4259Copyright © 2012 Pearson Education, Inc.
4260594   Parkin · Macroeconomics, Tenth Edition
42614) The horizontal axis on a time-series graph
4262A) measures the variable being graphed.
4263B) measures units of time such as years.
4264C) runs parallel to the y-axis.
4265D) measures how the variable being graphed changes.
4266Answer: B
4267Topic: Time-Series Graphs
4268Skill: Conceptual
4269Question history: Previous edition, Chapter 1
4270AACSB: Analytical Skills
42715) The figure above shows a time-series graph. The horizontal axis measures ________ and the
4272vertical axis measures ________.
4273A) time; x-values
4274B) time; the variable of interest
4275C) the variable of interest; time
4276D) y-values; the variable of interest
4277Answer: B
4278Topic: Time-Series Graphs
4279Skill: Recognition
4280Question history: Previous edition, Chapter 1
4281AACSB: Analytical Skills
4282Copyright © 2012 Pearson Education, Inc.
4283Chapter 4   Measuring GDP and Economic Growth   595
42846) A trend is
4285A) a measure of closeness on a scatter diagram.
4286B) a general tendency for a variable to rise or fall.
4287C) the maximum value of a variable.
4288D) the minimum value of a variable.
4289Answer: B
4290Topic: Time-Series Graphs
4291Skill: Recognition
4292Question history: Previous edition, Chapter 1
4293AACSB: Analytical Skills
42947) A trend shows
4295A) the degree of correlation between two variables.
4296B) the general tendency for a variable to rise or fall.
4297C) the scale used to measure to variables.
4298D) the increases in one variable.
4299Answer: B
4300Topic: Time-Series Graphs
4301Skill: Recognition
4302Question history: Previous edition, Chapter 1
4303AACSB: Analytical Skills
43048) Trend refers to
4305A) the scale used on the x- and y-coordinates.
4306B) increases but not decreases of a variable.
4307C) decreases but not increases of a variable.
4308D) a general tendency for a variable to rise or fall.
4309Answer: D
4310Topic: Time-Series Graphs
4311Skill: Recognition
4312Question history: Previous edition, Chapter 1
4313AACSB: Analytical Skills
43149) Which of the following is TRUE regarding a trend?
4315I. A cross section graph shows trends.
4316II. A time-series graph shows trends.
4317III. A scatter plot shows trends over time.
4318A) I
4319B) II
4320C) I and II
4321D) II and III
4322Answer: B
4323Topic: Time-Series Graphs
4324Skill: Conceptual
4325Question history: Previous edition, Chapter 1
4326AACSB: Analytical Skills
4327Copyright © 2012 Pearson Education, Inc.
4328596   Parkin · Macroeconomics, Tenth Edition
432910) Which type of graph is used to identify trends?
4330A) time-series
4331B) scatter diagram
4332C) cross-section
4333D) None of the above answers is correct.
4334Answer: A
4335Topic: Time-Series Graphs
4336Skill: Recognition
4337Question history: Previous edition, Chapter 1
4338AACSB: Analytical Skills
433911) Which of the following is correct about a time-series graph?
4340I. The x-axis measures time.
4341II. A time-series graph can reveal if there is a trend in the variable.
4342A) only I
4343B) only II
4344C) both I and II
4345D) neither I nor II
4346Answer: C
4347Topic: Time-Series Graphs
4348Skill: Recognition
4349Question history: Previous edition, Chapter 1
4350AACSB: Analytical Skills
435112) A time-series graph reveals whether there is a ________ which represents ________.
4352A) trend in a variable; a general tendency for the variable to rise or fall
4353B) relationship between two variables; a cross-section graph
4354C) trend in a variable; unrelated variables
4355D) relationship between two variables; a trend in a variable
4356Answer: A
4357Topic: Time-Series Graphs
4358Skill: Recognition
4359Question history: Previous edition, Chapter 1
4360AACSB: Analytical Skills
436113) A time-series graph showing total production in Japan from 1960 to 2010 shows a positive
4362trend. It is the case that total production
4363A) fell every year between 1960 and 2010.
4364B) rose every year between 1960 and 2010.
4365C) was lower in 2010 than in 1960.
4366D) was higher in 2010 than in 1960.
4367Answer: D
4368Topic: Time-Series Graphs
4369Skill: Conceptual
4370Question history: Modified 10th edition
4371AACSB: Analytical Skills
4372Copyright © 2012 Pearson Education, Inc.
4373Chapter 4   Measuring GDP and Economic Growth   597
437414) Using the above figure, during which month was the price for crude oil the highest?
4375A) July
4376B) December
4377C) May
4378D) October
4379Answer: B
4380Topic: Time-Series Graphs
4381Skill: Analytical
4382Question history: Previous edition, Chapter 1
4383AACSB: Analytical Skills
438415) Using the above figure, during which of the following periods does the price of crude oil have a
4385downward trend?
4386A) May to July
4387B) May to November
4388C) July to October
4389D) October to December
4390Answer: C
4391Topic: Time-Series Graphs
4392Skill: Analytical
4393Question history: Previous edition, Chapter 1
4394AACSB: Analytical Skills
4395Copyright © 2012 Pearson Education, Inc.
4396598   Parkin · Macroeconomics, Tenth Edition
439716) Using the above figure, during which of the following periods does the price of crude oil shows
4398an upward trend?
4399A) May to November
4400B) May to July and October to December
4401C) July to October
4402D) April to November
4403Answer: B
4404Topic: Time-Series Graphs
4405Skill: Analytical
4406Question history: Previous edition, Chapter 1
4407AACSB: Analytical Skills
440817) According to the graph in the figure above, which year experienced the most rapid change in
4409employment?
4410A) Year 2
4411B) Year 3
4412C) Year 4
4413D) Year 5
4414Answer: B
4415Topic: Time-Series Graphs
4416Skill: Analytical
4417Question history: Previous edition, Chapter 1
4418AACSB: Analytical Skills
4419Copyright © 2012 Pearson Education, Inc.
4420Chapter 4   Measuring GDP and Economic Growth   599
442118) In the above figure, the diagram shows
4422A) a downward trend in x.
4423B) an upward trend in x.
4424C) a scatter diagram.
4425D) a two-variable scatter diagram.
4426Answer: A
4427Topic: Time-Series Graphs
4428Skill: Conceptual
4429Question history: Previous edition, Chapter 1
4430AACSB: Analytical Skills
443119) Inflation climbed steadily from 1952 to 1972. A time-series graph with inflation on the vertical
4432axis and time (in years) on the horizontal axis would show
4433A) the rate of inflation as a horizontal line.
4434B) that inflation was following a decreasing trend line.
4435C) that inflation had a positive trend.
4436D) that inflation had a negative trend.
4437Answer: C
4438Topic: Time-Series Graphs
4439Skill: Analytical
4440Question history: Previous edition, Chapter 1
4441AACSB: Analytical Skills
4442Copyright © 2012 Pearson Education, Inc.
4443600   Parkin · Macroeconomics, Tenth Edition
444420) A time-series graph displays the price of copper. The slope of the line is negative for periods
4445when the
4446A) price of copper is falling.
4447B) price of copper is rising.
4448C) quantity of copper is falling.
4449D) price of copper is low and not changing.
4450Answer: A
4451Topic: Time-Series Graphs
4452Skill: Analytical
4453Question history: Previous edition, Chapter 1
4454AACSB: Analytical Skills
445521) A graph shows the wages of factory workers. The slope of the line is positive for periods when
4456the wage rate is
4457A) falling.
4458B) rising.
4459C) high but not rising any higher.
4460D) low.
4461Answer: B
4462Topic: Time-Series Graphs
4463Skill: Analytical
4464Question history: Previous edition, Chapter 1
4465AACSB: Analytical Skills
446622) On a time-series graph with a ratio scale,
4467A) the slope of the line is negative when the level of the variable is rising.
4468B) the same distance along the vertical axis measures different amounts of the variable.
4469C) time is plotted on the vertical axis rather than the horizontal axis.
4470D) it is impossible to determine a trend.
4471Answer: B
4472Topic: Ratio Scale
4473Skill: Analytical
4474Question history: New 10th edition
4475AACSB: Analytical Skills
447623) You believe that the total amount of goods produced in the United States has generally
4477increased over the years. In a time-series graph illustrating the total amount produced, you
4478expect to find
4479A) an upward trend.
4480B) no relationship between time and the amount of goods produced.
4481C) an inverse relationship between time and the amount of goods produced.
4482D) a linear relationship.
4483Answer: A
4484Topic: Study Guide Question, Time-Series Graphs
4485Skill: Recognition
4486Question history: Previous edition, Chapter 1
4487AACSB: Analytical Skills
4488Copyright © 2012 Pearson Education, Inc.
4489Chapter 4   Measuring GDP and Economic Growth   601
449010  Appendix: Essay Questions
44911) What kind of information is conveyed in a time-series graph?
4492Answer: A time series graph reveals four types of information. First, it shows the actual value of
4493the variable(s) at each point in time. Second, it shows whether the variable(s) is rising or
4494falling as time passes. Third, it shows the speed with which the variable(s) is changing.
4495Finally, it shows the presenceor absenceof a trend.
4496Topic: Time Series
4497Skill: Recognition
4498Question history: Previous edition, Chapter 1
4499AACSB: Communication
450011  Appendix: Numeric and Graphing Questions
45011) The figure above shows the price of a DVD player from 2003 to 2007.
4502a) What type of graph is illustrated above?
4503b) What is the trend in the price of a DVD player?
4504Answer: a) The graph is a time-series graph because it plots time along the horizontal axis and
4505the price of a DVD player along the vertical axis.
4506b) The trend in the price of a DVD player is negative, that is, the price of a DVD player
4507has generally decreased from one year to the next.
4508Topic: Time Series
4509Skill: Recognition
4510Question history: Previous edition, Chapter 1
4511AACSB: Analytical Skills
4512Copyright © 2012 Pearson Education, Inc.
4513602   Parkin · Macroeconomics, Tenth Edition
451412  Appendix: True or False
45151) A time series graph can show both the level of a variable and the speed with which the variable
4516changes over time.
4517Answer: TRUE
4518Topic: Graphing Data
4519Skill: Conceptual
4520Question history: Previous edition, Chapter 1
4521AACSB: Reflective Thinking
45222) A trend is a general tendency for a variable to increase or decrease over time.
4523Answer: TRUE
4524Topic: Graphing Data
4525Skill: Recognition
4526Question history: Previous edition, Chapter 1
4527AACSB: Reflective Thinking
452813  Mathematical Note: Chained-Dollar Real GDP
45291) Valuing the quantities of goods produced in consecutive years using prices in both years and
4530then averaging the percentage changes in the value of output is part of the ________ method of
4531calculating real GDP.
4532A) base-year
4533B) moving-base-year
4534C) chain-weighted output index
4535D) fixed quantities/variable prices
4536Answer: C
4537Topic: Real GDP
4538Skill: Recognition
4539Question history: Previous edition, Chapter 4
4540AACSB: Reflective Thinking
45412) The chain-weighted output index method ________.
4542A) is used to calculate the value of nominal GDP
4543B) values the quantities produced in a year at the prices of the base year
4544C) shows that real GDP increases every year
4545D) uses the prices of two adjacent years to calculate the real GDP growth rate
4546Answer: D
4547Topic: Chain-Weighted Growth Rate
4548Skill: Recognition
4549Question history: Previous edition, Chapter 4
4550AACSB: Reflective Thinking
4551Copyright © 2012 Pearson Education, Inc.
4552Chapter 4   Measuring GDP and Economic Growth   603
45533) Which of the following is TRUE regarding the chain-weighted output index method?
4554I. It is the method used to measure the growth rate of nominal GDP.
4555II. It uses data from the current year and from the previous year.
4556III. It is a method of measuring the growth rate of real GDP.
4557A) I and II
4558B) II and III
4559C) I and III
4560D) I, II and III
4561Answer: B
4562Topic: Chain-Weighted Growth Rate
4563Skill: Conceptual
4564Question history: Previous edition, Chapter 4
4565AACSB: Reflective Thinking
45664) The chain-weighted output index
4567A) uses only the current yearʹs prices to calculate growth in real GDP.
4568B) uses prices for the current year and the previous year to calculate growth in real GDP.
4569C) must be calculated only every other year.
4570D) is an inaccurate way to measure growth in real GDP and so has been replaced by the
4571ʺnominal-to-realʺ index.
4572Answer: B
4573Topic: Chain-Weighted Growth Rate
4574Skill: Conceptual
4575Question history: Previous edition, Chapter 4
4576AACSB: Reflective Thinking
45775) The chain-weighted output index method of calculating real GDP compares
4578A) compares the quantities of goods produced in consecutive years using prices in both years
4579and averaging the percentage changes in the value of output.
4580B) quantities produced in different years using prices from a year chosen as a reference
4581period.
4582C) quantities produced in different years with the prices that prevailed during the year in
4583which the output was produced.
4584D) prices at different points in time using a sample of goods that is representative of goods
4585purchased by households.
4586Answer: A
4587Topic: Chain-Weighted Growth Rate
4588Skill: Conceptual
4589Question history: Previous edition, Chapter 4
4590AACSB: Reflective Thinking
4591Copyright © 2012 Pearson Education, Inc.
4592604   Parkin · Macroeconomics, Tenth Edition
45936) The chain-weighted output index method of measuring real GDP is based on
4594A) using current prices rather than base year prices
4595B) averaging the market value of the expenditures over a two year period and then
4596comparing with a base period.
4597C) using the prices of two adjacent years to calculate the growth rate of real GDP.
4598D) averaging the nominal and real measures of GDP to come up with a more accurate figure.
4599Answer: C
4600Topic: Chain-Weighted Growth Rate
4601Skill: Conceptual
4602Question history: Previous edition, Chapter 4
4603AACSB: Reflective Thinking
46047) At 2010 prices, the value of production in 2011 was 6 percentage points higher than in 2010. At
46052011 prices, the value of production in 2011 was 4 percentage points higher than in 2010. Using
4606the chain-weighted output index, real GDP is ________ in 2011 than in 2010.
4607A) 10 percent greater
4608B) 5 percent greater
4609C) 7.5 percent greater
4610D) 4 percent smaller
4611Answer: B
4612Topic: Chain-Weighted Growth Rate
4613Skill: Analytical
4614Question history: Modified 10th edition
4615AACSB: Analytical Skills
46168) Real GDP in 2010 is $10 trillion. Between 2010 and 2011, using 2010 prices, GDP grew 3 percent
4617and using 2011 prices real GDP grew 7 percent. Using the chain-weighted output index
4618method, real GDP in 2011 is ________ trillion.
4619A) $10.5
4620B) $11
4621C) $10.1
4622D) $12.72
4623Answer: A
4624Topic: Chain-Weighted Growth Rate
4625Skill: Analytical
4626Question history: Modified 10th edition
4627AACSB: Analytical Skills
4628Copyright © 2012 Pearson Education, Inc.