1. Discuss the meaning of the statement where the economy grew “3.4 percent after accounting for inflation.”

When economic statistics such as economic growth rates are adjusted for inflation they are referred to as “real” measures of economic activity. In the current case, the growth rate would have been greater if not adjusted for inflationary impacts. Inflation complicates measuring economic growth because GDP is a price times quantity figure. If prices go up it appears the GDP went up also, but in reality the larger figure for GDP is partially because prices increased. For this reason economists adjust GDP and GDP growth rates for inflation. The result is a measure that can be compared from period to period.

2. Discuss why starting with low inventories in the second half of the year “bodes well for continued gains in output.”

Inventories are a part of business investment. Since GDP measures this years output it includes every thing produced whether it is sold or not so inventories are included in the measure of GDP. If companies start out a quarter with low inventories they are more likely to increase inventories and the increased inventories are counted in GDP. A DVD player produced in 2006 must be counted as output in 2006 even if it remains unsold. The result is a higher GDP which when compared to the previous year will result in a higher rate of growth than if the inventories were not counted.

Multiple Choice/True False Questions