Econ 222
Inflation Rate Formula
(Current year CPI ) - (Earlier Year CPI) / (Earlier Year CPI) x100
A painter pays $500 for paint he uses to repaint a house. He then presents a bill for $1200 that covers his time and expenses to the homeowner. How much do these transactions add to GDP?
. $1200
GDP is not a perfect measure of well-being; for example,
.GDP excludes the value of volunteer work.b.GDP does not address the distribution of income.c.GDP does not address environmental quality.
In computing GDP, market prices are used to value final goods and services because
.market prices reflect the values of goods and services.
An important difference between the GDP deflator and the consumer price index is that
.the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by consumers.
A U.S.-owned car factory in Mexico produces $5 million of cars. $2.5 million of these cars are sold in Mexico and the other $2.5 million are sold in the U.S. In both cases $1 million of the value of the cars was due to U.S-owned equipment located in Mexico and U.S. managers working in Mexico. How much did this production contribute to U.S. GDP?
0$
A country's real GDP rose from $500 to $530 while its nominal GDP rose from $600 to $700. What was this country's inflation rate?
10%
Between October 2014 and October 2015, the CPI in Canada rose from 120 to 124 and the CPI in Mexico rose from 210 to 229.1. What were the inflation rates for Canada and Mexico over this one-year period?
3.3 canada, 9.1 Mexico
From 2013 to 2014, the CPI for medical care increased from 150 to 159. What was the inflation rate for medical care?
6.0 percent
CPI formula
Current basket/base basket X100
Which of the following is included in the investment component of GDP?
John's law firm buys him a new computer.
Which of the following statements about nominal GDP and real GDP is correct?
Real GDP is a better gauge of economic well-being than nominal GDP.
In a simple circular-flow diagram, total income and total expenditure are
always equal because every transaction has a buyer and a seller.
GDP per person tells us the income and expenditure of the
average person in the economy.
Which of the following agencies calculates the CPI?
bls beureau of labor statistics
Changes in nominal GDP reflect
both changes in prices and changes in the amounts being produced.
government expenditures and imports.
carrots grown in your garden and eaten by your family
A U.S. citizen buys a tea kettle manufactured in China by a company that is owned and operated by U.S citizens. In which of the following components of U.S. GDP is this transaction accounted for?
consumption and imports
Real GDP is the yearly production of final goods and services valued at
current prices.
Because every transaction has a buyer and a seller,
every transaction contributes equally to an economy's income and to its expenditure.
GDP includes the value of all
final goods and services produced within a country using primarily market prices to measure the value of goods and services.
Gasoline is considered a final good if it is sold by a
gasoline station to a motorist in Los Angeles
For any given year, the CPI is the price of the basket of goods and services in the
given year divided by the price of the basket in the base year, then multiplied by 100.
The city of Ann Arbor Michigan buys a police car manufactured in Germany. In the GDP accounts this transaction is included in
government expenditures and imports.
In the CPI, goods and services are weighted according to
how much consumers buy of each good or service.
U.S. GDP
includes production of foreigners working in the U.S. but excludes production by U.S. residents working in foreign countries.
The introduction of the video cassette recorder in the 1970s exemplified a problem in measuring the cost of living; that problem is the problem of
introduction of new goods
Consider a small economy in which consumers buy only two goods: apples and pears. In order to compute the consumer price index for this economy for two or more consecutive years, we assume that
neither the number of apples nor the number of pears bought by the typical consumer changes from year to year.
Which of the following always uses prices and quantities from the same period?
nominal GDP but not real GDP.
Suppose an economy produces only eggs and ham. In 2009, 100 dozen eggs are sold at $3 per dozen and 50 pounds of ham sold at $4 per pound. In 2010, the base year, eggs sold at $1.50 per dozen and ham sold at $5 per pound. For 2009,
nominal GDP is $500, real GDP is $400
Changes in real GDP reflect
only changes in the amounts being produced.
Which of the following transactions is not included in GDP?
oranges sold by a farmer to a grocery store.
Nominal GDP will definitely increase when
prices increase and output increases
Which of the following is always measured in prices from a base-year?
real but not nominal
Price changes from year to year are not proportional, and consumers respond to these changes by altering their spending patterns. The problem this creates for inflation calculations is called
substitution bias
Economists use the term inflation to describe a situation in which
the economy's overall price level is rising.
If net exports is a negative number for a particular year, then
the value of foreign goods purchased exceeded the value of goods sold to foreigners during the year.
Because the CPI is based on a fixed basket of goods, the introduction of new goods and services in the economy causes the CPI to overestimate the cost of living. This is so because
when a new good is introduced, it gives consumers greater choice, thus reducing the amount they must spend to maintain their standard of living.
