True/False Indicate whether the sentence or statement is true or false. 1. For an economy as a whole, income equals expenditure because the income of the seller must be equal to the expenditure of the buyer. 2. The production of an apple contributes more to GDP than the production of a gold ring because food is necessary for life itself. 3. If a timber yard sells $1,000 of timber to a carpenter and the carpenter uses the timber to build a garage which he sells for $5,000, the contribution to GDP is $6,000. 4. A country with a larger GDP per person generally has a greater standard of living or quality of life than a country with a smaller GDP per person. 5. If nominal GDP in 2005 exceeds nominal GDP in 2004, real output must have risen. 6. If US GDP exceeds US GNP, then foreigners produce more in the US than US citizens produce in the rest of the world. 7. Wages are an example of a transfer payment because there is a transfer of payment from the firm to the worker. 8. In the US, investment is the largest component of GDP. 9. Nominal GDP employs current prices to value output while real GDP employs constant base-year prices to value output. 10. A new car produced in 2004, but first sold in 2005, should be counted in 2005 GDP because that is when it was first sold as a final good. 11. When the city council of Southampton purchases a new school building, the investment component of GDP increases. 12. A recession occurs when real GDP declines. 13. Depreciation is the value of the wear and tear on the economy's equipment and structures. 14. Net National Product always exceeds a nation's total income because of depreciation and taxes. Multiple Choice Identify the letter of the choice that best completes the statement or answers the question. 15. An example of a transfer payment is a. profit. b. rent. c. unemployment benefits. d. government purchases. e. wages. 16. The value of plant and equipment worn out in the process of manufacturing goods and services is measured by a. intermediate production. b. Net National Product. c. investment. d. depreciation. e. consumption. 17. Which of the following would be excluded from UK GDP for 2005? The sale of a. a haircut. b. the value of a lawyer's services. c. a 2005 Honda made in Swindon. d. All of things mentioned in these answers should be counted in 2005 GDP. e. a home built in 2004 and first sold in 2005. 18. Gross Domestic Product can be measured as the sum of a. final goods and services, intermediate goods, transfer payments, and rent. b. consumption, investment, government purchases, and net exports. c. consumption, transfer payments, wages, and profits. d. Net National Product, Gross National Product, and Disposable personal income. e. investment, wages, profits, and intermediate production. 19. UK Gross Domestic Product (in contrast to Gross National Product) measures the production and income of a. British-owned firms no matter where they are located in the world. b. none of these answers. c. the domestic service sector only. d. people and factories located within the borders of the UK. e. the domestic manufacturing sector only. 20. Gross Domestic Product is the sum of the market value of the a. intermediate goods. b. final goods and services. c. manufactured goods. d. inferior goods and services. e. normal goods and services. 21. If nominal GDP in 2005 exceeds nominal GDP in 2004, then the production of output a. must have fallen. b. must have risen. c. must have stayed the same. d. may have risen, fallen, or stayed the same because there is not enough information to determine what happened to real output. 22. If a cobbler buys leather for 100 and thread for 50 and uses them to produce and sell 500 worth of shoes to consumers, the contribution to GDP is a. 50. b. 100. c. 650. d. 500. e. 600. 23. GDP would include which of the following? a. the value of taking a day off from work b. consulting services c. intermediate sales d. illegal drug sales e. housework 24. Real GDP is measured in ________ prices while nominal GDP is measured in ________ prices. a. foreign; domestic b. current year; base year c. domestic; foreign d. base year; current year e. intermediate; final 25. The following table contains information about an economy that produces only pens and books. The base year is 2003. Year Price of pens Quantity of pens Price of books Quantity of books 2003 $3 100 $10 50 2004 3 120 12 70 2005 4 120 14 70 a. none of these answers b. $800 c. $1,200 d. $1,460 e. $1,060 26. The following table contains information about an economy that produces only pens and books. The base year is 2003. Year Price of pens Quantity of pens Price of books Quantity of books 2003 $3 100 $10 50 2004 3 120 12 70 2005 4 120 14 70 What is the value of real GDP for 2004? a. $800 b. $1,060 c. $1,460 d. $1,200 e. none of these answers 27. The following table contains information about an economy that produces only pens and books. The base year is 2003. Year Price of pens Quantity of pens Price of books Quantity of books 2003 $3 100 $10 50 2004 3 120 12 70 2005 4 120 14 70 What is the value of the GDP deflator in 2004? a. 119 b. 138 c. 116 d. 113 e. 100 28. The following table contains information about an economy that produces only pens and books. The base year is 2003. Year Price of pens Quantity of pens Price of books Quantity of books 2003 $3 100 $10 50 2004 3 120 12 70 2005 4 120 14 70 What is the percentage increase in prices from 2003 to 2004? a. 16 percent b. 22 percent c. 13 percent d. 0 percent e. 38 percent 29. The following table contains information about an economy that produces only pens and books. The base year is 2003. Year Price of pens Quantity of pens Price of books Quantity of books 2003 $3 100 $10 50 2004 3 120 12 70 2005 4 120 14 70 What is the approximate percentage increase in prices from 2004 to 2005? a. 13 percent b. 0 percent c. 16 percent d. 38 percent e. 22 percent 30. The following table contains information about an economy that produces only pens and books. The base year is 2003. Year Price of pens Quantity of pens Price of books Quantity of books 2003 $3 100 $10 50 2004 3 120 12 70 2005 4 120 14 70 What is the percentage increase in real GDP from 2004 to 2005? a. 27 percent b. 7 percent c. 32 percent d. 0 percent e. 22 percent 31. If US GDP exceeds US GNP, then a. intermediate production exceeds final production. b. foreigners are producing more in the US than Americans are producing in foreign countries. c. real GNP exceeds nominal GNP. d. real GDP exceeds nominal GDP. e. Americans are producing more in foreign countries than foreigners are producing in the US. 32. US GDP would exclude which of the following? a. Lawyer services purchased by a home buyer. b. The purchase of a new Nissan produced in Japan c. A new art gallery purchased by the city of New York. d. Lawn care services purchased by a homeowner. e. None of the above. 33. How is your purchase of a $40,000 BMW automobile that was produced entirely in Germany recorded in the US GDP accounts? a. Consumption increases by $40,000 and net exports decreases by $40,000. b. Net exports increase by $40,000. c. There is no impact because this transaction does not involve domestic production. d. Investment increases by $,000 and net exports increases by $40,000. e. Net exports decrease by $40,000. 34. If your grandparents buy a newly built retirement home, this transaction will affect a. investment. b. net exports. c. government purchases. d. consumption. e. none of these answers