Question 1

Explain the two approaches that can be used to compute GDP. Why do these two approaches lead to the same value for GDP?

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Question 2

Suppose Mexico does not allow multinational companies to put up factories within its borders, but has a lot of Mexican companies with factories in Brazil and Argentina. In this example, is GDP or GNP larger for Mexico? Explain.

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Question 3

Suppose economists find a way to include all economic activity (underground or otherwise) in GDP. How will this affect the GDP of rich and poor countries? Will the new GDP per capita exhibit more income inequality across countries? Explain.

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Question 4

The expenditure approach calculates GDP by summing final consumption, investment expenditures, government expenditures and net exports.

Accepted Answer

This is the correct definition of the expenditure approach to calculating GDP.

Question 5

Explain why the following items are included in GDP:
(a) depreciation
(b) change in business inventories
(c) indirect taxes

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Question 6

Transfer payments are subtracted from national income to get to personal income.

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Question 7

The Bahamas is a chain of islands whose economy relies heavily on tourism. The majority of the hotels and resorts in the island are owned by foreign countries. Which do you think is larger, Bahamas' GDP or GNP? Explain.

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Question 8

Explain how real GDP could be increased without using additional inputs.

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Question 9

What is the difference between GDP and GNP?

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Question 10

If output of each good or service doubles and all prices remain the unchanged, nominal GDP doubles.

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Nominal GDP is calculated by multiplying the quantity of goods and services produced by their respective prices. If the output of each good or service doubles and all prices remain unchanged, then the quantity of goods and services produced doubles, resulting in a doubling of nominal GDP.

Question 11

List some limitations of GDP as a measurement of social welfare.

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Question 12

Recall Application 3, "The Links Between Self- Reported Happiness and GDP," to answer the following questions:
-According to the Application 3, self- reported levels of happiness in the U.S. and the U.K. increased over the last 30 years as per capita incomes in those countries increased.

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Question 13

Explain the relationship among gross investment, net investment, and depreciation.

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Question 14

All economic activities are included in the GDP.

Accepted Answer

GDP only includes the value of goods and services produced within a country's borders during a specific time period. It does not include non-market activities such as volunteer work, household production, or illegal activities.

Question 15

Based on the expenditure approach, discuss and explain each of the components of GDP.

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Question 16

Identify which of the following item(s) would be included in U.S. GDP:
(a) the salary of an American consultant hired by a British firm to go to Europe and analyze their operations there.
(b) the output of a U.S.- owned family farm in Kansas.
(c) food stamp payments.
(d) welfare checks.
(e) the wages of a field worker in Louisiana.

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Question 17

Suppose you buy a $40,000 BMW from your local dealership. The car was built completely in Germany. Assuming no dealer mark- up on the car, how would your purchase be recorded in US GDP accounts? By how much would US GDP increase as a result of your purchase?

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Question 18

If nominal GDP increased during a year, then output must have increased.

Accepted Answer

Nominal GDP can increase due to higher prices (inflation) even if the actual output (real GDP) remains the same or decreases.

Question 19

GDP is equal to GNP plus depreciation.

Accepted Answer

GDP is equal to the total value of all goods and services produced within a country's borders (regardless of nationality) during a certain period of time, while GNP is equal to the total value of all goods and services produced by a country's residents (regardless of location) during a certain period of time. Depreciation, on the other hand, is the decrease in value of an asset over time. Therefore, GDP does not include depreciation (which is a non-productive and non-income generating activity), while GNP does include it (since it reflects the income earned by a country's residents, including depreciation).

Question 20

Explain why real GDP is a more reliable estimate of economic growth.

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Quiz 5: Measuring a Nations Production and Income