Test Your Knowledge GDP Click on the letter choices to test your understanding ABC

Question 1 GDP is defined as: The amount by which the revenues of the Federal Government exceed its expenditures each year A The total market value of all final goods and services produced within a country in a given period, usually a year B The expenditures made in an economy on capital goods C

Try again! Government expenditures on goods and services are included in the calculation of GDP, but it does not calculate the amount by which government expenditures exceed government revenues. Back

Correct! GDP is the market value of all final goods and services produced within a country in a given period of time, usually a year. As such, it represents the total output of the country and is therefore used to measure economic growth compared over periods of time. Next

Try again! The purchase of new capital goods such as tools, instruments, machines, buildings, and other construction, as well as inventories are all counted in GDP, but investment is only one of the four components of GDP. Back

Question 2 GDP is measured by: The Bureau of Labor Statistics A The Federal Reserve B The Bureau of Economic Analysis (BEA) C

Try again! The Bureau of Labor Statistics (BLS) of the U.S. Department of Labor is the main Federal agency responsible for measuring labor market activity, working conditions, and price changes in the economy. The BLS calculates the Consumer and Producer Price Indexes and the unemployment rate, but it does not calculate GDP. Back

Try again! The Federal Reserve uses information from the agency that calculates GDP to assess the health of the economy, but it does not calculate GDP itself. Back

Correct! The U.S. Department of Commerces Bureau of Economic Analysis measures GDP through its measurement of the national income and product accounts. Next

Question 3 GDP can be expressed by which formula? C + I + G + (X-M) A MV=PQ B S=I + NX C

Correct! C+I+G+ (X-M) is the correct formula for GDP. C= Consumption, or household spending on goods and services I= Investment, or the purchase of new capital goods, as well as inventories G= Government purchases of goods and services (X-M)= The value of goods and services exported minus the value of goods and services imported. Next

Try again! MV=PQ is known as the equation of exchange, and reflects the Quantity Theory of Money. M= the money supply V= the velocity of money P= the price level Q= the real physical output of goods and services Back

Try again! In an open economy, savings equal both investment and net exports, which are both components of GDP, but not the formula to express GDP. Back

Question 4 The components of GDP are: Consumption, Investment, Government Spending, and Net Worth A Consumption, Investment, Government spending, and Net Exports B Government revenues minus government spending C

Try again! Net worth is not calculated by GDP. Back

Correct! The components of GDP are Consumption (C), Investment (I), Government (G), and Net Exports (X-M). Next

Try again! Government expenditures on goods and services are included in the calculation of GDP, but it does not calculate the amount by which government expenditures exceed government revenues. Back

Question 5 The largest component of GDP is: Government spending A Investment B Consumption C

Try again! Government spending accounts for 19% of GDP growth on average since 2003, but it is not the largest component. Back

Try again! Investment has accounted for 16% of average GDP growth since 2003, but it is not GDPs largest component. Back

Correct At 70%, consumption, or household spending on goods and services accounts for the largest proportion of GDP. Next

Question 6 Consumption refers to: Expenditures by households on goods and services A Household spending on goods, but not services B Spending by both households and government on goods and services C

Correct! Consumption is expenditures by households on goods and services. It includes durables, non-durables, and services. Next

Try again! Services such as a haircut, use of internet or cable services, or treatment by a doctor are all included in GDP. Back

Try again! Consumption measures the expenditure by households on goods and services; government purchases of goods and services are counted in their own category. Back

Question 7 GDP does not include: Financial transactions A Services B Construction of new buildings and homes C

Correct! Financial assets such as stocks and bonds are non-production transactions and are therefore not counted in GDP. Next

Try again! Services such as a haircut, use of internet or cable services, or treatment by a doctor are all included in GDP. Back

Try again! The construction of buildings and new homes is accounted for in the investment component of GDP. Back

Question 8 How does real GDP differ from nominal GDP? Nominal is the estimated GDP for the coming year, while real is the actual calculated rate A Nominal GDP only counts consumption expenditures; Real GDP also counts investment and government spending B Real GDP is nominal GDP adjusted for inflation C

Try again! While the Bureau of Economic Analysis does provide advance estimates of GDP, these estimates do not reflect the distinction between real and nominal GDP. Back

Try again! Both nominal and real GDP include all four components of GDP: consumption, investment, government, and net exports. Back

Correct! Nominal GDP reflects this years production measured in this years prices. Real GDP measures this years production using constant prices, therefore adjusting for inflation. Because Real GDP captures changes in production levels only, it is a more accurate measure of the current level of output. Next

Question 9 Real GDP per capita is: The capital expenditures per person of a nation A The average real output per person B A good measure of a countrys standard of living C

Try again! Capital expenditures are captured in the investment component of GDP, but this is only one of the four parts that make up the measure of GDP. Back

Correct! Real GDP per capita is measured by dividing a nations Real GDP by its population to get a measure of the average real output per person of a nation. It is often used to compare economic conditions between nations; however, it is not used to measure social well- being. Next

Try again! Real GDP per capita correlates to a nations standard of living, but is not a measure of standard of living in and of itself. Back

Question 10 The Business Cycle: Is predictable and avoidable A Accurately depicts how real life cycles behave B Refers to economic upturns and downturns over time reflecting the cyclical nature of the economy C

Try again! Most economists believe that the business cycle cannot be avoided. It is impossible to predict precisely when different periods within a business cycle will occur in the economy, as it does not follow a regular time pattern. Back

Try again! Real life cycles are not always like those in textbooks; analysis of the economy over the past fifty years shows the unpredictable pattern of economic activity. Back

Correct! The business cycle refers to the economic upturns and downturns over time, that is, the cyclical nature of the economy to expand and contract and the trends of unemployment, price levels and output associated with expansions and contractions. Next

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