QUESTIONS FOR REVIEW

1. Explain why an economy’s income must equal its expenditure.

2. Which contributes more to GDP the production of an economy car or the production of a luxury car Why?

3. A farmer sells wheat to a baker for $2. The baker uses the wheat to make bread, which is sold for $3. What is the total contribution of these transactions to GDP?

4. Many years ago, Peggy paid $500 to put together a record collection. Today, she sold her albums at a garage sale for $100. How does this sale affect current GDP?

5. List the four components of GDP. Give an example of each.

6. Why do economists use real GDP rather than nominal GDP to gauge economic well-being?

7. In the year 2005, the economy produces 100 loaves of bread that sell for $2 each. In the year 2006, the .economy produces 200 loaves of bread that sell for $3 each. Calculate nominal GDP, real GDP, and the GDP deflator for each year. (Use 2005 as the base year.) By what percentage does each of these three statistics .rise from one year to the next?

8. Why is it desirable for a country to have a large GDP? Give an example of something that would raise GDP and yet be undesirable .