1.Define real and nominal GDP. Which is a better measure of economic well-being? Why? (5 marks)

2.Why do economists use real GDP rather than nominal GDP to gauge economic well-being? (5 marks)

3.In the year 2014, the economy produces 100 loaves of bread that sell for $2 each. In the year 2015, the economy produces 200 loaves of bread that sell for $3 each. Calculate nominal GDP, real GDP, and the GDP deflator for each year. (Use 2014 as the base year.) By what percentage does each of these three statistics rise from one year to the next? (13 marks)

4.Many years ago Peggy paid $500 to put together a record collection. Today she sold her albums at a garage sale for $100. How does this sale affect current GDP? (3 marks)

5.A farmer sells wheat to a baker for $2. The baker uses the wheat to make bread, which is sold for $3. What is the total contribution of these transactions to GDP? (3 marks)

6.Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is $4. In year 2, the quantity produced is 4 bars and the price is $5. In year 3, the quantity produced is 5 bars and the price is $6. Year 1 is the base year.

a.What is nominal GDP for each of these three years? (6 marks)

b.What is real GDP for each of these years? (6 marks)

c.What is the GDP deflator for each of these years? (6 marks)

d.What is the inflation rate as measured by the GDP deflator from year 2 to year 3? (4 marks)

7.Which of the following does NOT add to Canada's GDP? (1 mark)

a. Air France buys a plane from Bombardier, the Canadian aircraft manufacturer.

b. PotashCorp develops a new mine in Saskatchewan.

c. The city of Toronto pays a salary to a police officer.

d.The federal government sends a Canada Pension Plan cheque to your grandmother.

8.What is the largest component of GDP? (1 mark)

a.consumption

b.investment

c.government purchases

d.net exports

9.Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each of which has a market price of $40. Collette buys one of them, while the other remains on the shelf of Barnaby's store to be sold later. What is GDP here? (1 mark)

a.$40

b.$60

c.$80

d.$100