GDP AND GNP QUESTIONNAIRE AND ANSWERS
1. Draw a diagram of the circular flow of income including households and firms and show how it can be used to measure GDP.
2. How would you include the government, financial institutions and the rest of the world in the circular flow diagram?
3. A farmer grows a kilo of wheat and sells it to a miller for €1.00. The miller turns the wheat into flour and sells it to a baker for €3.00. The
baker uses the flour to make a loaf of bread and sells it to an engineer for €6.00. The engineer eats the bread.
(a) What is the value added by each person?
(b) What is the addition to GDP?
4. Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him
as before (but as a husband rather than as an employee). How does the marriage affect GDP? How should it affect GDP?
5. Place each of the following transactions in one of the four components of expenditure for the German economy (C, I, G, NX):
a BMW sells a car to a German Household.
b BMW sells a car to a US resident.
c BMW sells a car to the German government.
d BMW makes a car to be sold next year.
6. Consider an economy that produces and consumes dvds and cars. In the following table are data for two different years:
Table 1
Year 2000 Year 2010
Price of a car £50,000 £60,000
Price of a dvd £10 £20
Number of cars produced 100 120
Number of dvds produced 500,000 400,000
, Using the year 2000 as the base year, calculate nominal GDP and real GDP.
7. Using the data in Table 1 calculate the GDP deflator and the the CPI.
8. Suppose the government is thinking of index-linking state retirement pensions, so that it will increase the pensions paid to offset the cost of
living. The government minister responsible asks you for your advice as to whether to use the GDP deflator or the CPI. Which do you advise
her to use? Why?
9. In your country, which would you want to be bigger, GDP or GNP? Why?
10. Is GDP a good measure of economic welfare? List and explain SEVEN important types of economic activity that it doesn’t include.
11. Consider how each of the following events is likely to affect the real GDP of the country concerned. Do you think the change in real GDP
reflects a similar change in economic well-being?
a A freak hurricane in northern France forces Disneyland Paris to shut down for a month.
b The discovery of a new easy-to-grow strain of wheat increases British farm harvests.
c Increased hostility between unions and management sparks a rash of strikes in Italy.
d Firms throughout the German economy experience falling demand, causing them to lay off workers.
e The European Parliament passes new environmental laws that prohibit EU firms from using production methods that emit large quantities
of pollution.
f More Irish university students drop out of university to take jobs painting houses.
g Greek fathers reduce their working weeks in order to spend more time with their children.
12. In a country the unemployment rate is 6 per cent. If the population is 300 million, the number unemployed is 6 million and the number
employed is 94 million, what is the size of the workforce?
13.
Category Number of People (millions)
Total population 246
Working age population 207
1. Draw a diagram of the circular flow of income including households and firms and show how it can be used to measure GDP.
2. How would you include the government, financial institutions and the rest of the world in the circular flow diagram?
3. A farmer grows a kilo of wheat and sells it to a miller for €1.00. The miller turns the wheat into flour and sells it to a baker for €3.00. The
baker uses the flour to make a loaf of bread and sells it to an engineer for €6.00. The engineer eats the bread.
(a) What is the value added by each person?
(b) What is the addition to GDP?
4. Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him
as before (but as a husband rather than as an employee). How does the marriage affect GDP? How should it affect GDP?
5. Place each of the following transactions in one of the four components of expenditure for the German economy (C, I, G, NX):
a BMW sells a car to a German Household.
b BMW sells a car to a US resident.
c BMW sells a car to the German government.
d BMW makes a car to be sold next year.
6. Consider an economy that produces and consumes dvds and cars. In the following table are data for two different years:
Table 1
Year 2000 Year 2010
Price of a car £50,000 £60,000
Price of a dvd £10 £20
Number of cars produced 100 120
Number of dvds produced 500,000 400,000
, Using the year 2000 as the base year, calculate nominal GDP and real GDP.
7. Using the data in Table 1 calculate the GDP deflator and the the CPI.
8. Suppose the government is thinking of index-linking state retirement pensions, so that it will increase the pensions paid to offset the cost of
living. The government minister responsible asks you for your advice as to whether to use the GDP deflator or the CPI. Which do you advise
her to use? Why?
9. In your country, which would you want to be bigger, GDP or GNP? Why?
10. Is GDP a good measure of economic welfare? List and explain SEVEN important types of economic activity that it doesn’t include.
11. Consider how each of the following events is likely to affect the real GDP of the country concerned. Do you think the change in real GDP
reflects a similar change in economic well-being?
a A freak hurricane in northern France forces Disneyland Paris to shut down for a month.
b The discovery of a new easy-to-grow strain of wheat increases British farm harvests.
c Increased hostility between unions and management sparks a rash of strikes in Italy.
d Firms throughout the German economy experience falling demand, causing them to lay off workers.
e The European Parliament passes new environmental laws that prohibit EU firms from using production methods that emit large quantities
of pollution.
f More Irish university students drop out of university to take jobs painting houses.
g Greek fathers reduce their working weeks in order to spend more time with their children.
12. In a country the unemployment rate is 6 per cent. If the population is 300 million, the number unemployed is 6 million and the number
employed is 94 million, what is the size of the workforce?
13.
Category Number of People (millions)
Total population 246
Working age population 207
