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8 May, 2015 - 11:10

A price index is constructed by taking the weighted average of the prices of a basket of goods in a given year divided by the weighted average of the prices of the same basket in a base year. A well known price index is the consumer price index or CPI.

The consumer price index is simply an average of prices reported by various consumers from different markets during a telephone survey conducted periodically. Such an average of prices is adequately portraying the presence of any inflation.

Review Quiz

  1. The technical wording used to designate depreciation (means of production used up during one year) is
    1. construction consumption allowance,
    2. capital capacity allocation,
    3. construction capacity appropriation,
    4. capital consumption allowance.
  2. True or False: Calculating GNP by summing value added at all stage of production is equivalent to summing the market value of all final goods and services.
    1. true,
    2. false,
    3. no valid answer.
  3. A newly produced car which was not sold during a given year will be included in GNP as part of
    1. personal consumption expenditures,
    2. government expenditures,
    3. gross private domestic investment,
    4. not included at all in GNP.
  4. The difference between GNP and NNP is
    1. capital consumption allowance,
    2. transfer payments,
    3. indirect business taxes,
    4. personal income tax.
  5. True or False: GNP is generally considered as an adequate measure of a nation's well-being because it reflects the quality of the products used.
    1. true,
    2. false,
    3. no valid answer.
  6. The capital which is included in GNP as investment, is that which is
    1. replacing capital used during the year,
    2. only financed by new issues of stocks and bonds,
    3. a net addition to the stock of capital,
    4. the sum of all purchases of machinery and equipment.
  7. Which of the following is NOT excluded from national income accounting?
    1. illegal transactions,
    2. transactions of second hand items,
    3. financial transactions,
    4. exports.
  8. True or False: Economic policies are based on guesswork whether or not national income accounts are available.
    1. true,
    2. false,
    3. no valid answer.
  9. Which of the following items is NOT part of government expenditures in GNP?
    1. welfare payment checks,
    2. salaries of policemen,
    3. the construction of highway,
    4. the purchase of paper for printing ballots for elections.
  10. To obtain real or constant dollar GNP, GNP should be
    1. deducted from a price index,
    2. multiplied by a price index,
    3. divided by a price index,
    4. added to a price index.
  11. Intermediate goods are excluded from GNP in order to avoid
    1. recession,
    2. inflation,
    3. double counting,
    4. including underground economy.
  12. Which of the following is included in the difference between PI (Personal Income) and NI (National Income)?
    1. corporate income tax,
    2. property tax,
    3. personal income tax,
    4. sales tax.
  13. True or False: Financial transactions, such as buying stocks and bonds are not included in GNP.
    1. true,
    2. false,
    3. no valid answer.
  14. Net exports is equal to
    1. exports minus depreciation,
    2. exports minus changes in inventory,
    3. exports minus imports,
    4. imports minus exports.
  15. National income accounting is measuring the
    1. level of satisfaction or well-being of a nation,
    2. level of economic activity,
    3. stock of resources (used and unused) generating income,
    4. income that one nation gives to some other nation.
  16. The name given to the sum total of all goods and services produced during a year, minus the capital consumed during that year, is ... ............ ............ (3 words).
  17. What are the words (or abbreviations) used to designate the total market value of all final goods and services produced in one country over the period of one year?
  18. The name given to a ratio of average prices in a given year over the average prices in a base year, is price .......
  19. The specific word which is used for goods which are not purchased for further manufacturing or processing, but which are bought by the end consumer, is ..... (goods).
  20. The name given to the income received by households, net of the personal income taxes, is .......... ............ (2 words).


  1. D
  2. A
  3. C
  4. A
  5. B
  6. D
  7. D
  8. B
  9. A
  10. C
  11. C
  12. A
  13. A
  14. C
  15. B
  19. FINAL


  1. Outline the major revenue sources and expenses of the Federal Government. Do the same for state and local governments.
  2. Use the circular flow model to explain the two basic approaches and the various components of National Income Accounting.
  3. Breakdown GNP into its components in both the expenditure and income approaches, and reconcile the two.
  4. Present the effects of a positive and negative net investment on economic activity. Comment on the roles of changes in inventory and capital consumption allowance.
  5. Why does GNP need to be adjusted, and how is it adjusted? How is a price index constructed and used?