TUT Macro Unit 2 (Sept 2016)

MODULE: MACROECONOMICS BB106
Unit 2: Circular Flow and National Income Accounting

TUTORIAL 2
Short-answer Problems
1) Of what use is national income accounting to economists and to policy makers?
2) Discuss the merits and demerits of GDP as a measure of the economys output performance and as
a measure of its standard of living.
3) Which of the following are included and which are excluded in calculating this years GDP? Explain
in each instance.
(a) Social Security checks received by a retired person
(b) An increase in business inventories
(c) The income of a tax accountant working for a business
(d) Income received from interest on a corporate bond
(e) The cashing in of a U.S. savings bond
4) The following table shows the price of a specific stereo receiver for a five-year period. Using year 3
as the base year, calculate the price index for each year.
Year
Price
Price index
$ 88
_____
$100
_____
$120
_____
$132
_____
$140
_____
5) The following data show nominal GDP and the appropriate price index for several years. Compute
real GDP for each year and indicate whether you have inflated or deflated nominal GDP in
finding real GDP. All GDP are in billions.
Nominal
GDP
Price level
index
Year
Inflated (I)
Real GDP
Deflated (D)
$117
120
_____
_____
124
104
_____
_____
143
85
_____
_____
149
96
_____
_____
178
112
_____
_____
220
143
_____
_____
6) The following is a list of figures for a given year in billions of dollars. Using this data, compute: (a)
GDP; (b) NDP; (c) NI; (d) PI; (e) DI; (f) Net exports.
Billions
of dollars
Transfer payments
$ 16
Government purchases
80
Personal taxes
38
Corporate income taxes
28
Taxes on production and imports
15
Social Security contributions

Undistributed corporate profits
Proprietors income
8
19
25
Compensation of employees
258
Personal consumption expenditures
322
Consumption of fixed capital
Rents
10
U.S. Exports
14
Corporate profits
70
Interest
12
Dividends
23
Imports to U.S.
17
Gross private domestic investment
63
Net foreign factor income
10
Statistical discrepancy
35
True / False Questions

1) Both intermediate and final goods are counted as part of GDP.
2) Disposable income measures the before-tax income received by resource suppliers.
3) NDP can be determined by adding taxes on production and imports to GDP.
4) Welfare payments to low-income families are included in national income.
5)
The value of the personal labor time spent repairing a home is included in GDP.
6) Within the circular flow model, the level of total resource income and total spending on output will
be approximately equal.
7) The simplest way to calculate GDP is to sum the total sales of all business firms.
8) A product that was produced in 2006 and not sold until 2007 is counted as part of GDP in 2007.
9) GDP tends to understate economic welfare because it does not take into account increases in
leisure.
10) If real GDP is 50 and nominal GDP is 100, the GDP price index is 200.
Multi-Choice Questions
1. GDP is the:
A. national income minus all non-income charges against output.
B. monetary value of all final goods and services produced within the borders of a nation in a particular
year.
C. monetary value of all economic resources used in producing a year's output.
D. monetary value of all goods and services, final and intermediate, produced in a specific year.
2. Which is a primary use for national income accounting?
A. To analyze the environmental cost of economic growth
B. To assess the economic efficiency of specific industries in the economy
C. To measure changes in the value of goods and services produced in the economy
D. To determine whether there is a fair and equitable distribution of income in the economy
3. Suppose the total monetary value of all final goods and services produced in a particular country in
2008 is $500 billion and the total monetary value of final goods and services sold is $450 billion. We can
conclude that:
A. GDP in 2008 is $450 billion.
B. NDP in 2008 is $450 billion.
C. GDP in 2008 is $500 billion.
D. inventories in 2008 fell by $50 billion.
4. National income accountants can avoid multiple counting by:

A. including transfers in their calculations.
B. only counting final goods.
C. counting both intermediate and final goods.
D. only counting intermediate goods.
5. A large underground economy results in an:
A. understated GDP.
B. overstated GDP.
C. understated GDP price index.
D. overstated GDP price index.
6.Tom grows tomatoes for home consumption. This activity is:
A. excluded from GDP in order to avoid double counting.
B. excluded from GDP because an intermediate good is involved.
C. productive but is excluded from GDP because no market transaction occurs.
D. included in GDP because it reflects production.
7. Arthur sells $100 worth of cotton to Bob. Bob turns the cotton into cloth, which he sells to Camille for
$300. Camille uses the cloth to make prom dresses that she sells to Donita for $700. Donita sells the
dresses for $1200 to kids attending the prom. The total contribution to GDP of this series of transactions
is:
A. $1200
B. $500
C. $2300
D. $1100
8. GDP can be calculated by summing:
A. consumption, investment, government purchases, exports, and imports.
B. investment, government purchases, consumption, and net exports.
C. consumption, investment, wages, and rents.
D. consumption, investment, government purchases, and imports.
9. GDP data are criticized as being inaccurate measures of economic welfare because:
A. they do not take into account changes in the amount of leisure.
B. they do not take into account all changes in product quality.
C. they do not take into account the adverse effects of economic activity on the environment.
D. all of these considerations.
10. If the price index is 130, this means that:

A. Prices are 130 percent higher than in the base year
B. Prices are .13 times higher than in the base year
C. Prices are 30 percent higher than in the base year
D. Nominal GDP must be inflated to determine the real GDP
11. The fact that nominal GDP has risen faster than real GDP:
A. suggests that the base year of the GDP price index has been shifted.
B. tells us nothing about what has happened to the price level.
C. suggests that the general price level has fallen.
D. suggests that the general price level has risen.
12. If nominal GDP rises:
A. real GDP may either rise or fall.
B. we can be certain that the price level has risen.
C. real GDP must fall.
D. real GDP must also rise.
13. Which of the following is a final good or service?
A. a haircut
B. fertilizer purchased by a farm supplier
C. diesel fuel bought for a delivery truck
D. Chevrolet windows purchased by a General Motors assembly plant
14. In calculating GDP, governmental transfer payments, such as social security or unemployment
compensation, are:
A. not counted.
B. counted as investment spending.
C. counted as government spending.
D. counted as consumption spending.
15. Which of the following activities is excluded from GDP, causing GDP to understate a nation's wellbeing?
A. the services of used-car dealers
B. the child-care services provided by stay-at-home parents
C. the construction of new houses
D. government expenditures on military equipment

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MODULE: MACROECONOMICS BB106

Unit 2: Circular Flow and National Income Accounting

Corporate income taxes

Taxes on production and imports

Social Security contributions

Personal consumption expenditures

Consumption of fixed capital

Gross private domestic investment

Net foreign factor income

True / False Questions

4. National income accountants can avoid multiple counting by:

10. If the price index is 130, this means that:

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