ECON 110 FINAL EXAM STUDY GUIDE QUESTIONS WITH
CORRECT ANSWERS 2026/2027
GDP definition - CORRECT ANSWER -the market value of all final goods and services produced
within a country in a given period of time
GDP calculation - CORRECT ANSWER -GDP = C + I + G + NX
Problems with GDP - CORRECT ANSWER -fails to account for non market goods, unreported
economic activity, environmental quality/leisure time/political freedom
Real GDP - CORRECT ANSWER -GDP adjusted for inflation
Nominal GDP - CORRECT ANSWER -GDP measured in current prices
GDP Deflator - CORRECT ANSWER -a measure of the price level, calculated as Nominal GDP/Real
GDP x 100
per capita GDP - CORRECT ANSWER -GDP divided by the total population
Consumption components of GDP - CORRECT ANSWER -Y = C + I + G + NX
C = Consumption
I = Investment
G = Government Spending
NX = Net Exports
, Problems with using GDP as a measure of production and income - CORRECT ANSWER -1). It
may change because of price changes even if the rate of production doesn't change in an
economy
2). Only measures activities in markets, ignoring non-markets or illegal market transactions
3). Does not include the value of leisure
4). Does not include financial and second-hand transactions
5). Does not include intermediate goods
6). Does not account for the size of a population nor do changes account for population growth
7). Not a measure of individual well-being
CPI definition - CORRECT ANSWER -a measure of the overall cost of the goods and services
bought by a typical consumer
CPI calculation - CORRECT ANSWER -(cost of basket in current year/cost of basket in base year) x
100
Basket of goods - CORRECT ANSWER -the representative items that a household buys over a
period of time on which inflation calculations are based.
Biases in calculating the Consumer Price Index (CPI) - CORRECT ANSWER -1. Substitution bias -
When prices change from one year to the next, they do not all change proportionately. If a price
index is computed assuming a fixed basket of goods, it ignores the possibility of consumer
substitution and therefore overstates the increase in the cost of living from one year to the next.
2. Introduction of new goods - When a new good is introduced, consumers have more variety
from which to choose, and this increased variety in turn reduces the cost of maintaining the
same level of economic well-being. As new goods are introduced, consumers have more
choices, and each dollar is worth more.
3. Unmeasured quality change - If the quality of a good deteriorates from one year to the next
while its price remains the same, you are getting a lesser good for the same amount of money,
CORRECT ANSWERS 2026/2027
GDP definition - CORRECT ANSWER -the market value of all final goods and services produced
within a country in a given period of time
GDP calculation - CORRECT ANSWER -GDP = C + I + G + NX
Problems with GDP - CORRECT ANSWER -fails to account for non market goods, unreported
economic activity, environmental quality/leisure time/political freedom
Real GDP - CORRECT ANSWER -GDP adjusted for inflation
Nominal GDP - CORRECT ANSWER -GDP measured in current prices
GDP Deflator - CORRECT ANSWER -a measure of the price level, calculated as Nominal GDP/Real
GDP x 100
per capita GDP - CORRECT ANSWER -GDP divided by the total population
Consumption components of GDP - CORRECT ANSWER -Y = C + I + G + NX
C = Consumption
I = Investment
G = Government Spending
NX = Net Exports
, Problems with using GDP as a measure of production and income - CORRECT ANSWER -1). It
may change because of price changes even if the rate of production doesn't change in an
economy
2). Only measures activities in markets, ignoring non-markets or illegal market transactions
3). Does not include the value of leisure
4). Does not include financial and second-hand transactions
5). Does not include intermediate goods
6). Does not account for the size of a population nor do changes account for population growth
7). Not a measure of individual well-being
CPI definition - CORRECT ANSWER -a measure of the overall cost of the goods and services
bought by a typical consumer
CPI calculation - CORRECT ANSWER -(cost of basket in current year/cost of basket in base year) x
100
Basket of goods - CORRECT ANSWER -the representative items that a household buys over a
period of time on which inflation calculations are based.
Biases in calculating the Consumer Price Index (CPI) - CORRECT ANSWER -1. Substitution bias -
When prices change from one year to the next, they do not all change proportionately. If a price
index is computed assuming a fixed basket of goods, it ignores the possibility of consumer
substitution and therefore overstates the increase in the cost of living from one year to the next.
2. Introduction of new goods - When a new good is introduced, consumers have more variety
from which to choose, and this increased variety in turn reduces the cost of maintaining the
same level of economic well-being. As new goods are introduced, consumers have more
choices, and each dollar is worth more.
3. Unmeasured quality change - If the quality of a good deteriorates from one year to the next
while its price remains the same, you are getting a lesser good for the same amount of money,
