ECO501 – Principles of Economics

Tutorial 7 GDP
A. Multiple Choice Questions
1. The Sale in 2023 of a car first produced and sold in 2022 would not be included in the GDP of
2023 because doing so would involve:
A) including a non-market transaction
B) including an intermediate product
C) including a non-investment transaction
D) double counting

2. The service a baby sitter relative performs when she/he stays at home and looks after the
babies while the parents are out partying, and for which she/she is not paid in not included in
GDP because:
A) it is a non-market transaction
B) it is a non-productive transaction
C) it is a non-investment transaction
D) double counting would be involved

3. Which of the following does not represent investment?

A) the increase in the quantity of shoes on the shelves of a shoe shop
B) the construction of a house that will be occupied by the owner but used for business
C) the purchase of newly issued shares in Telekom
D) the construction of a factory building using money borrowed from the bank

4. Suppose Solomon Island’s GDP is $3452 billion. Consumer expenditures are $2343 billion,
Government purchases are $865 billion and gross investment is $379 billion. Net exports are?
A) + $93 billion
B) + $123 billion
C) - $45 billion
D) - $135 billion

5. Gross Domestic Product is equal to the market value of all the final goods and services
________ in a given period of time.
A) produced within a country
B) consumed within a country
C) consumed by the citizens of a country
D) produced by the citizens of a country
E) produced and consumed within a country

6. If you make dinner for yourself

A) the market value of your dinner is added to GDP.
B) your service in preparing the meal is valued at a cook's wage and added to GDP.
C) none of what you bought to prepare for dinner is included in GDP.
D) only the market value of ingredients that you purchased this year is added to GDP.
E) the difference between the cost of the ingredients that you purchased this year and the market
value of the dinner is added to GDP.

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 7. The level of real GDP the economy produces at full employment is called
A) sustainable GDP.
B) nominal GDP.
C) potential GDP.
D) maximum GDP.
E) Lucas GDP.

8. One bag of coffee beans is sold for $7 to a cafe that uses it to brew coffee which it sells to
customers for a total of $15. A second bag of coffee is sold directly to Joan for $7, who
uses it to brew coffee for her family every morning. What is the contribution to GDP
from the purchases of coffee beans and coffee?
A) $7
B) $14
C) $15
D) $22
E) $29

9. In one year, a firm increases its production by $9 million and increases sales by $8
million. All other things in the economy remaining the same, which of the following is
TRUE?
A) GDP increases by $8 million and inventory investment decreases by $1 million.
B) GDP increases by $9 million and inventory investment increases by $1 million.
C) Inventory investment decreases by $1 million.
D) GDP increases by $8 million and investment increases by $1 million.
E) GDP increases by $17 million.

10. When measuring GDP

A) the government sector is not included because it is the public sector not the private sector.
B) the government sector is counted, and the value of the government sector in GDP is equal to
its tax revenue.
C) only the federal government's expenditure on goods and services are included.
D) the expenditure on goods and services by all levels of government are included.
E) the government sector is not counted because it does not produce goods and services.

11. In calculating GDP, we must

A) add the market value of imports and subtract the market value of exports.
B) add the market value of exports and subtract the market value of imports.
C) exclude net exports of goods and services (NX).
D) add the value of the goods produced outside of the United States by American firms.
E) subtract the market value of imports, because these goods are produced in a country other
than the United States, and subtract the market value of exports, because these goods are
consumed in a country other than the United States.

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 12. Gross Domestic Product equals
A) Y = C + I - G + NX.
B) Y = C - I + G + NX.
C) Y = C + I + G + NX.
D) Y = C - I - G - NX.
E) Y = C + I + G - NX.

13. Last year in Candamica, consumption expenditure was $20 billion, interest, rent, and
profit were $2.5 billion, government expenditure on goods and services was $7 billion,
net exports of goods and services was $5 billion, and investment was $2 billion. Hence
total expenditure was
A) $24.5 billion.
B) $34.5 billion.
C) $36.5 billion.
D) $34 billion.
E) undetermined without information about imports.

14. Suppose that business firms spend $500 million on new capital equipment this year. Of
this $500 million, $300 million was spent on domestically produced capital and $200
million was spent on foreign-produced capital. All else equal, these transactions
contribute ________ to GDP.
A) $0
B) $200 million
C) $300 million
D) $500 million
E) $800 million

15. The table gives data for a nation. What is the amount of the country's GDP?
A) $6,000 billion
B) $6,200 billion
C) $6,600 billion
D) $6,900 billion
E) $5,800 billion

16. The table gives data for a nation. The value of the country's net exports of goods and
services shows that the country's
A) value of its exports exceeded the value of its imports.
B) value of its imports are negative.

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C) net exports of goods and services are decreasing.
D) value of its imports exceeded the value of its exports.
E) value of its imports must equal zero.

17. In 2009 in the United States, net domestic product at factor cost was $11,091 billion.
Additionally, rent was $2,000 billion, profits were $1,000 billion, and interest was $358
billion. Hence wages were
A) $7,733 billion.
B) $9,091 billion.
C) $10,091 billion.
D) $8,091 billion.
E) $12,091 billion.

18. The base year is 2020. A country only produces purses. The price of a purse in 2018 was
$50. The price of a purse was $30 in 2020. The quantity of purses produced in 2018 was
10,000 units and in 2020 was 20,000 units. Nominal GDP in 2020 equals
A) $1,000,000.
B) $500,000.
C) $600,000.
D) $200,000.
E) an amount that cannot be determined without information about real GDP in 2020.

19. The base year is 2012. A country only produces Blu-ray players. The price of a Blu-ray
player in 2012 was $100. The price of a Blu-ray player was $90 in 2013. The quantity of
Blu-ray players produced in 2012 was 10,000 units and in 2013 was 10,500 units. Real
GDP in 2012 equals
A) $900,000.
B) $945,000.
C) $1,000,000.
D) $1,050,000.
E) an amount that cannot be determined without information about real GDP in 2007.

20. If the economy is fully employed, which of the following is true?

A) The price level equals 100.
B) Real and nominal GDP are equal.
C) Real and potential GDP are equal.
D) The unemployment rate is zero.
E) Real GDP cannot increase.

21. Economists define investment to include purchases of

A) capital goods and inventories.
B) capital goods, household durable goods, and inventories.
C) capital goods, such as tools, instruments, and buildings.
D) capital goods, equity stocks, and bonds.
E) capital goods, equity stocks, and inventories.

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B. Short-Answer Question
1. A farmer grows wheat and sells 1000 kilograms at $2.00 per kg to a miller. The Miller converts
the wheats into flour and produced 700 kilograms of flour and sold everything to a baker at
$4.00 per kilo. The baker uses the flour to make 500 loafs of break and sell these to the public at
$10.00 per loaf. Compute the value added at each stage of production and GDP.

2. Suppose an economy has this data for the years 2019, 2020 & 2021.

2019 2020 2021

Unit price Quantity Unit price Quantity Unit price Quantity
Good A $30 900 $31 1000 $36 1050
Good B $100 192 $102 200 $100 205

(a) Compute Nominal GDP in each year

(b) Compute real GDP in each year using 2019 as the base year.