MACRO: Measurement of Economic Performance Flashcards

Which of the following transactions would be EXCLUDED from GDP calculations?

Answer: A homeowner sells a house built in 1985

GDP only counts newly produced goods and services; resale of existing assets like a previously built house is excluded.

If nominal GDP grows by 8% and the GDP deflator rises by 5%, what is the approximate growth rate of real GDP?

Answer: 3%

Real GDP growth ≈ nominal GDP growth minus inflation, so 8% − 5% = 3%.

Which component of GDP is most volatile over the business cycle?

Answer: Investment

Investment (especially business fixed investment and inventories) fluctuates most sharply with economic conditions.

A country's CPI basket was determined in 2015. A weakness of using this fixed basket through 2025 is that it:

Answer: Ignores new goods and substitution behavior

A fixed-basket CPI suffers substitution bias and new-goods bias because it does not update to reflect consumer responses to relative price changes.

In the circular flow model, which of the following represents a leakage from the spending stream?

Answer: Household saving

Saving represents income that exits the circular flow without being immediately spent on domestic output.

The underground economy is NOT counted in official GDP figures. What is the most direct consequence?

Answer: Official GDP understates the true level of economic activity

Unreported transactions (illegal activity, off-the-books work) are excluded, so measured GDP is lower than actual production.

A U.S. auto company produces cars at its factory in Mexico. This output is included in:

Answer: Mexico's GDP and U.S. GNP

GDP is location-based (production in Mexico) while GNP is ownership-based (U.S. company), so it enters Mexico's GDP and U.S. GNP.