Question

1. The country of Macroland produces only cookies. Production is as follows: 300 kilograms of cookies...

1. The country of Macroland produces only cookies. Production is as follows: 300 kilograms of cookies in 2017 and 150 kilograms in 2018. Prices were as follows: 4 euros in 2017 and 6 euros in 2018. With these figures in mind we know that the change in the GDP deflator in 2018 over 2017 was                   

  1. unknown, since we need to fix a base year to calculate the change in the GDP deflator.   
  2. no change since the percentage fall in quantity is equal to the percentage increase in prices
  3. an increase of 50%.               
  4. a fall of 50%.

2. Suppose a painting is produced and sold in 2018 for £5,000. The expenses involved in producing the painting amounted to £2,000. From those £2,000, £500 were spent on paying the model that appears in the painting, £200 for the rental of the studio, and the rest was used to purchase the material (intermediate goods). According to the sum- of-value-added method of calculating GDP, the value added by the final step of creating the painting was:                

  1. £4,300.                       
  2. £3,700.                       
  3. £5,000.                       
  4. £2,000.

3. In the production function, assume that there are decreasing returns to capital, decreasing returns to labor, and constant returns to scale. Now suppose that both capital and labour decrease by 5 %. Given this information, we know that output (Y) will?

  1. decrease by less than 5 %.
  2. decrease by 5%.
  3. decrease by more than 5 %.
  4. not change.

4. Suppose that in Macroland, real GDP in 2017 was $1’000’000’000 (base year 1992) and $1’050’000 (base year 1992) in year 2018. We can say that between 2017 and 2018

  1. There is not enough information to know what has happened to output and prices
  2. Output rises 5%
  3. Price have risen 5%
  4. Prices have risen by 3% and output by 2%

5. Which of the following will be included in the calculation of GDP using the expenditure approach?

  1. Dividends paid by firms to shareholders
  2. Interest paid by households for loans
  3. Services purchased by the government
  4. Wages paid to labour firms

Homework Answers

Answer #1

1. Option a.

GDP deflator is calculated as =

Nominal GDP/Real GDP × 100.

Further to calculate nominal and real GDP we must fix base year.

2. Option d.

For creation of painting all expenses will be added, viz rent, material and wages. This amounts to £2000. The next step of value addition is included in selling of painting.

3. Option b.

Constant returns to scale means an increase or decrease in input leads to proportional change in output. So if both inputs decrease by 5%, Total output falls by 5%.

4. Option a.

From just Real GDP figures of two periods, information about changes in output and prices cannot be determined.

5. Option c.

GDP using Expenditure approach is -

GDP = C+I+G+ NX

The rest options used in Income approach of GDP calculation.

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