An economy has consumption of $500 billion, investment of $100 billion, government purchases of $150 billion, exports of $60 billion and imports of $80 billion. What is its GDP?
$730 billion
✓
$890 billion
$810 billion
$750 billion
Correct Answer
$730 billion
GDP = C + I + G + (X - M) = 500 + 100 + 150 + (60 - 80) = 750 - 20 = $730 billion. $890 billion adds imports instead of subtracting them. $810 billion adds exports but forgets to subtract imports. $750 billion leaves out net exports entirely.
Category: Expenditure Approach
Question 2
A country exports $200 billion of goods and services and imports $250 billion in a year. What does this give for its net exports?
A trade surplus of $50 billion
A trade deficit of $50 billion
✓
A trade deficit of $450 billion
A trade surplus of $450 billion
Correct Answer
A trade deficit of $50 billion
Net exports equal exports minus imports: 200 - 250 = -$50 billion, and a negative balance is a trade deficit. A trade surplus of $50 billion gets the sign backward. A trade deficit of $450 billion and a trade surplus of $450 billion add the two flows instead of subtracting them.
Category: Expenditure Approach
Question 3
Nominal GDP is $1,200 billion and the GDP deflator is 120. What is real GDP?
$1,440 billion
$1,080 billion
$1,000 billion
✓
$10 billion
Correct Answer
$1,000 billion
Real GDP = nominal GDP / (price index / 100) = 1,200 / 1.2 = $1,000 billion. $1,440 billion multiplies by the deflator instead of dividing. $1,080 billion subtracts the index number from nominal GDP. $10 billion divides by 120 without first dividing the index by 100.
Category: Real and Nominal GDP
Question 4
Nominal GDP is $1,500 billion and real GDP is $1,250 billion. What is the GDP deflator?
83.3
250
1.2
120
✓
Correct Answer
120
GDP deflator = (nominal GDP / real GDP) x 100 = (1,500 / 1,250) x 100 = 1.2 x 100 = 120. 83.3 divides real GDP by nominal GDP, inverting the ratio. 250 is the dollar gap between the two figures. 1.2 forgets to multiply by 100, the way price indexes are published.
Category: Real and Nominal GDP
Question 5
Real GDP rises from $800 billion in one year to $840 billion the next. What is the growth rate of real GDP?
5 percent
✓
4.8 percent
40 percent
105 percent
Correct Answer
5 percent
The growth rate is the change divided by the starting value: (840 - 800) / 800 x 100 = 40 / 800 x 100 = 5 percent. 4.8 percent divides by the ending value instead of the starting value. 40 percent confuses the $40 billion change with a percentage. 105 percent is the new level as a percentage of the old one, not the growth rate.
Category: Real and Nominal GDP
Question 6
Nominal GDP grows by 7 percent in a year, and the GDP deflator shows prices rising by 3 percent. Approximately how fast did real GDP grow?
About 10 percent
About 4 percent
✓
About 21 percent
About 2.3 percent
Correct Answer
About 4 percent
For small changes, real GDP growth is approximately nominal GDP growth minus the inflation rate: 7 - 3 = about 4 percent. About 10 percent adds inflation instead of removing it. About 21 percent multiplies the two rates. About 2.3 percent divides one rate by the other.
Category: Real and Nominal GDP
Question 7
A country has GDP of $600 billion and a population of 30 million. What is its GDP per capita?
$2,000
$200,000
$20,000
✓
$20
Correct Answer
$20,000
GDP per capita is GDP divided by population: 600,000,000,000 / 30,000,000 = $20,000. $2,000 and $200,000 come from misplacing a factor of ten when converting billions and millions. $20 divides 600 by 30 without accounting for the units.
Category: Comparing Countries
Question 8
A country's GDP is 500 billion pesos, and the exchange rate is 20 pesos per U.S. dollar. What is its GDP in U.S. dollars?
$10,000 billion
$480 billion
$2.5 billion
$25 billion
✓
Correct Answer
$25 billion
To convert, divide GDP in the domestic currency by the number of pesos per dollar: 500 / 20 = $25 billion. $10,000 billion multiplies by the exchange rate instead of dividing. $480 billion subtracts the exchange rate. $2.5 billion misplaces the decimal point.
Category: Comparing Countries
Question 9
A country's GDP is $2,000 billion. Its residents receive $30 billion of income from abroad, and it pays $20 billion of income to foreign residents. What is its GNP?
$2,010 billion
✓
$1,990 billion
$2,050 billion
$1,970 billion
Correct Answer
$2,010 billion
GNP starts with GDP, adds income received from abroad and subtracts income paid to foreign residents: 2,000 + 30 - 20 = $2,010 billion. $1,990 billion reverses the two adjustments. $2,050 billion adds both amounts. $1,970 billion subtracts both amounts.
Category: GDP and Related Measures
Question 10
A farmer sells wheat to a miller for $1, the miller sells flour to a baker for $3, and the baker sells a loaf of bread to a shopper for $5. By how much does this chain raise GDP?
$9
$5
✓
$4
$8
Correct Answer
$5
GDP counts only the final good, the $5 loaf, which already includes the value added at each stage: $1 by the farmer, $2 by the miller and $2 by the baker. $9 adds up every sale and double counts the wheat and flour. $4 subtracts the wheat but ignores the value it represents. $8 still double counts the flour.
Category: What GDP Counts
Question 11
Which purchase is counted as investment in GDP?
A family buying a new refrigerator
A retiree buying a government bond
A company buying new machinery for its factory
✓
A student buying a used textbook
Correct Answer
A company buying new machinery for its factory
Investment in GDP is spending on new physical capital such as equipment, structures and inventories, so new factory machinery qualifies. A family buying a new refrigerator is consumption. A retiree buying a government bond is a financial transaction, not new output. A student buying a used textbook is left out because the book was counted when it was first produced.
Category: Expenditure Approach
Question 12
Social Security checks paid to retirees are left out of the government spending component of GDP. Why?
They are counted as investment instead
They are paid for with borrowed money
They are counted in net exports instead
They are transfer payments, not purchases of new output
✓
Correct Answer
They are transfer payments, not purchases of new output
Government spending in GDP includes only purchases of goods and services. Social Security, unemployment benefits and veterans' benefits move income from taxpayers to recipients without buying any newly produced good or service. They are counted as investment instead is wrong because nothing new is built. They are paid for with borrowed money has nothing to do with how GDP is measured. They are counted in net exports instead is wrong because they are not trade with other countries.
Category: Expenditure Approach
Question 13
A carmaker produces 1,000 cars this year but sells only 900. How are the 100 unsold cars treated in this year's GDP?
They count as inventory investment
✓
They are left out until sold next year
They count as government spending
They are subtracted as depreciation
Correct Answer
They count as inventory investment
GDP measures what is produced in a year, so goods made this year but not sold are counted as an increase in inventories, a part of investment, as if the firm bought them from itself. They are left out until sold next year would assign this year's production to the wrong year. They count as government spending is wrong because no government bought them. They are subtracted as depreciation confuses unsold output with wear on capital.
Category: What GDP Counts
Question 14
A factory in Mexico that is owned by a U.S. company produces auto parts. Where is the value of that output counted?
In U.S. GDP and Mexico's GNP
In Mexico's GDP and U.S. GNP
✓
In U.S. GDP and U.S. GNP
In Mexico's GDP and Mexico's GNP
Correct Answer
In Mexico's GDP and U.S. GNP
GDP counts output by where it is produced, so the factory's output is in Mexico's GDP. GNP counts output by the nationality of the producers, wherever they operate, so output of a U.S.-owned firm abroad is in U.S. GNP. In U.S. GDP and Mexico's GNP reverses both measures. In U.S. GDP and U.S. GNP ignores that the production happens in Mexico. In Mexico's GDP and Mexico's GNP ignores that the owners are U.S. residents.
Category: GDP and Related Measures
Question 15
What is the lowest point of a recession, just before the economy begins to recover, called?
Peak
Expansion
Trough
✓
Depression
Correct Answer
Trough
The trough is the bottom of a recession, where real GDP stops falling and the next upswing starts. Peak is the high point before a recession begins. Expansion is the period of rising output from a trough to the next peak. Depression is an especially long and deep recession, not a single point in time.
Category: Business Cycle
Question 16
Which organization determines the official start and end dates of U.S. recessions?
Federal Reserve
Bureau of Labor Statistics
Congressional Budget Office
National Bureau of Economic Research
✓
Correct Answer
National Bureau of Economic Research
The National Bureau of Economic Research, a private nonprofit research group, dates the peaks and troughs of the U.S. business cycle. The Federal Reserve is the central bank and conducts monetary policy. The Bureau of Labor Statistics measures employment and prices. The Congressional Budget Office analyzes the federal budget for Congress.
Category: Business Cycle
Question 17
A homeowner who used to mow her own lawn hires a lawn service for $500 a year to do the same work. What happens to measured GDP?
It rises by $500, though the amount of mowing is unchanged
✓
It does not change, because the same work gets done
It falls by $500, because the homeowner spends money
It rises by $1,000, because both parties gain
Correct Answer
It rises by $500, though the amount of mowing is unchanged
Work done for oneself at home is not a market transaction and is left out of GDP, but the same work bought from a business is counted at its price. So measured GDP rises by $500 even though no extra mowing happens. It does not change, because the same work gets done ignores that GDP counts only market production. It falls by $500, because the homeowner spends money confuses spending with lost output. It rises by $1,000, because both parties gain counts the same $500 transaction twice.
Category: What GDP Counts
Question 18
A government raises income tax rates and cuts its spending on highways. What type of policy is this?
Monetary policy
Fiscal policy
✓
Trade policy
Industrial policy
Correct Answer
Fiscal policy
Fiscal policy is the use of government spending and taxes to influence the economy. Monetary policy is the management of the money supply and interest rates by the central bank. Trade policy concerns tariffs and other rules on trade with other countries. Industrial policy aims to promote particular industries rather than adjusting overall taxes and spending.
Category: Goals and Policy Tools
Question 19
A U.S. family buys a new $30,000 car that was made in Japan. All else equal, how does this purchase affect U.S. GDP?
U.S. GDP rises by $30,000
U.S. GDP falls by $30,000
U.S. GDP does not change
✓
U.S. GDP rises by $60,000
Correct Answer
U.S. GDP does not change
The purchase adds $30,000 to consumption, but because the car was produced abroad it also adds $30,000 to imports, which are subtracted. The two effects cancel, so U.S. GDP is unchanged; the car counts in Japan's GDP. U.S. GDP rises by $30,000 forgets to subtract imports. U.S. GDP falls by $30,000 subtracts imports without adding the consumption. U.S. GDP rises by $60,000 adds both entries.
Category: Expenditure Approach
Question 20
Which of these is counted in GDP?
A parent cooking dinner for the family
A purchase of a government bond
A cash gift from a grandparent
A haircut bought at a barbershop
✓
Correct Answer
A haircut bought at a barbershop
A haircut is a final service sold in a market at a price, so its value is counted. A parent cooking dinner for the family is unpaid household production outside the market. A purchase of a government bond is a financial transaction, not new output. A cash gift from a grandparent is a transfer that buys no good or service.
Category: What GDP Counts