Deck 8: Measuring the Aggregate Economy

Question 1

What is national income? What are its four components?

Answer 1

National income is total income earned by citizens and businesses of a country.National income consists of four income items: compensation of employees,rents,interest,and profit.

Question 2

What is net foreign factor income,and how can we use it to determine whether GNP or GDP is larger?

Answer 2

Net foreign factor income is the income from foreign domestic factor sources minus foreign factor income earned domestically.Note that GNP = GDP + net foreign factor income.If income from foreign domestic factor sources is greater than foreign factor income earned domestically,net factor income is positive and GNP is greater than GDP.If net foreign factor income is negative,GNP is smaller than GDP.

Question 3

Why might per capita GDP comparisons of living standards between countries be misleading? What do economists do to avoid some of the problems?

Answer 3

Comparing per capita GDP between countries can be misleading for two main reasons.First,prices and incomes vary from country to country.So,for example,while a per capita GDP of $5,000 might be considered quite low in the U.S.,it is likely to be quite high in many African countries where prices are much lower.The other reason is because,in many countries,most economic activities occur "off the books" and do not show up as part of the GDP per capita figures (such as subsistence farming).When there is a lot of underground economic activity,the reported GDP per capita figures significantly understate the true income per capita.Economists calculate per capita GDP adjusted for purchasing power parity,which adjusts for the different relative prices among countries before making comparisons.(LO6)

Question 4

What is meant by "GDP"? What are the four expenditure components of GDP and what is included in each of these components?

Question 5

There are two possible ways to avoid counting intermediate goods (i.e.,double counting)in calculating GDP.Identify each of them and discuss each briefly.

Question 6

Define real and nominal GDP and explain why the growth of real GDP is more important to society than the growth in nominal GDP?

Question 7

How can GDP be calculated without "double counting"?

Question 8

Purchases of stocks and bonds in economic terminology are not investment.Explain why this statement is true.

Question 9

Without national income accounting there would not be any macroeconomics.Evaluate this statement.

Question 10

What is national income accounting and why is it useful?

Question 11

Aggregate income is divided into four categories.They are (1)Compensation of Employees, (2)Rents, (3)Interest and (4)Profits.Briefly describe what is and is not included in each category.

Question 12

What are the four expenditure components of GDP?

Question 13

If nominal GDP grew at 4% per year over the past four years,can we be sure that everyone is better off now?

Question 14

Why will calculating GDP using the expenditure approach give you the same value as using the income approach? What types of data would be needed for each approach?

Question 15

Why is the definition of profit the key to explaining the equality between aggregate income and aggregate production?

Question 16

What are personal consumption expenditures?

Question 17

What is the distinction between gross domestic product (GDP)and net domestic product (NDP)? In theory,which is a superior measure of aggregate output?

Question 18

What is the difference between GDP and GNP? How are they related?

Question 19

What is gross private investment?

Question 20

What is the difference between Gross Domestic Product and Gross National Product? What is the difference between Gross Domestic Product (GDP)and Net Domestic Product (NDP)?

Question 21

Determine the amount contributed to GDP from the sale of 200,000 copies of the CD by R.L.Burnside (on Fat Possum Records)entitled "Too Bad Jim" by filling in the table below.Base your answer on the following information:
R.L.receives $3 per CD in royalties.
Fat Possum sells each CD to wholesalers for $10.
Wholesalers sold the CD to retailers for an average price of $12 per CD.
Retailers sold 200,000 CDs to consumers for $15 per CD.
Demonstrate how the value-added approach equals the final sales approach.

Question 22

Why is it difficult to measure real wealth?

Question 23

In economics it is important to know the distinction between flow concepts and stock concepts.Explain this distinction,and give examples of each.

Question 24

Briefly describe two limitations of national income accounting.

Question 25

What is nominal wealth?

Question 26

If real income has risen from $5 trillion to $5.3 trillion and the price level went up by 12%,by what dollar amount has nominal income risen?

Question 27

Suppose there is a stock market bubble (asset inflation)that bursts (rapid asset deflation).People see the value of their investments fall rapidly.Has their real wealth changed? Explain.

Question 28

Which of the following transactions is considered a purchase of final output? Which one is considered the purchase of an intermediate good?
(a)Albert purchased a camera from the U.S.to use on his vacation in the Bahamas.
(b)Albert purchased a roll of film to use in his camera.
(c)An owner of a bakery purchased wheat to make bread.
(d)A chocolate factory purchased milk to make chocolate.
(e)The Ford Company purchased 10 tons of steel to make cars.
(f)Sue purchased cleaning detergent to use in her newly purchased washing machine.
(g)Karen bought tomato seeds and planted them in her backyard for her own use.

Question 29

Assume an economy produces just cars and computers; use the information in the table below to answer the following questions about the GDP.
(1)Calculate nominal GDP in 2009 and 2010.What is the growth rate in nominal GDP?
(2)Using 2009 as a base year,calculate real GDP in 2010.What is the growth rate in real GDP?
(3)Calculate the GDP deflator in 2010.

Question 30

You've been given the following data:
On the basis of these data calculate GDP,NDP,and GNP.

Question 31

In calculating GDP by the expenditure method,there are two ways to avoid the double counting of intermediate goods.Demonstrate your understanding of these two methods by showing how both produce the same calculation of contribution to GDP.Assume the following: 1)Iron ore is produced by iron mining,which is sold to steel makers for $30 million (we will make the simplifying assumption that iron mining uses no intermediate goods).2)The iron ore is all used to make steel,which is sold to automobile makers for $100 million.3)The steel is all used to make automobiles,which are sold to dealers for $250 million.4)All of the automobiles are sold by the dealers to consumers for $350 million.What are the two methods,and what contribution to GDP can be calculated by each method,from the above assumptions?

Question 32

What is real wealth?

Question 33

Answer all of the following questions concerning GDP growth.
(a)Nominal GDP increases from $5 trillion to $5.5 trillion while the price level increases by 10%.Has real income increased?
(b)Nominal GDP increases from $6 trillion to $6.8 trillion while real GDP increases from $6 trillion to $6.2 trillion.What happened to the price level?
(c)Nominal GDP increases from $7 trillion to $8 trillion while real GDP increases from $7 trillion to $7.5 trillion.By what percent did real income change?

Question 34

Your economics professor asked you to use data from the U.S.economy to show that GNP can be calculated using the income approach and the expenditures approach.What type of data should you gather to complete this assignment?

Question 35

If asset inflation has occurred,which has changed: real wealth,nominal wealth or both?

Question 36

Describe in your own words the difference between a stock and a flow.For each of the following activities,determine whether it is a stock concept or a flow concept:
(a)Sue earns $5.75 per hour working at the Burger Barn.
(b)On his way home from work,Sam finds a ten-dollar bill.
(c)Upon graduation,John accepts a job with a salary of $2000.
(d)Jennifer saves 10% of her monthly income.
(e)Alex saves $1,000 a year.
(f)Japan has a capital to labor ratio of 10 where China has a capital to labor ratio of 2.

Question 37

Calculate the contribution to GDP that would be the result of each of the following transactions:
(a)The government purchases an airplane for $6 million.
(b)A citizen sells a used car for $6,000.
(c)A citizen sells a used car to a dealer for $6,000,who resells it to a consumer for $7,500.
(d)A citizen sells a bond for $1,000 that they bought last year for $600.
(e)The government issues a social security check for $1,250 (ignore the administrative costs of issuing the check).