a. Why in microeconomics can we measure production in terms of quantity,
but in macroeconomics we measure production in terms of market value?
b. If the Australian Bureau of Statistics added up the values of every good and
service sold during the year, would the total be larger or smaller than GDP?
c. In the circular flow of expenditure and income, why must the value of total
production in an economy equal the value of total income?
4
2
a. Describe the four major components of expenditures in GDP and write the
equation used to represent the relationship between GDP and the four
expenditure components.
b. Why does the size of a country’s GDP matter? How does it affect the
quality of life of the country’s people?
3
a. Why does inflation make nominal GDP a poor measure of the increase in total
production from one year to the next? How does the ABS deal with the problem
inflation causes with nominal GDP?
b. What is the main problem arising from the use of base year prices to measure
real GDP?
4
a. Why does the size of a country’s GDP matter? How does it affect the quality
of life of the country’s people?
b. Is the value of a house built in 2000 and resold in 2018 included in the GDP
of 2018? Why or why not? Would the services of the real estate agent who
helped sell (or buy) the house in 2018 be counted in GDP for 2018? Why or
why not?
c. Which component of GDP will be affected by each of the following
transactions? If you believe that none of the components of GDP will be
affected by the transactions, briefly explain why.
i. You purchase a new apartment.
ii. You purchase a second-hand car.
iii. An overseas person studies a degree at an Australian university.
iv. A dairy farmer in Victoria produces milk which is shipped to
Singapore.
v. A Bakers Delight store purchases a new oven.
vi. The government builds new roads to help improve access to mine
sites in Western Australia.
Sample Solution
