Deck 6: Measuring National Output and National Income

Question 1

Explain why we must take into account changes in business inventories when calculating GDP.

Answer 1

Changes in business inventories can be positive, negative, or zero. If they are positive, some goods produced in a given period were not purchased. Because GDP measures the value of the goods and services produced in a given period, we must take into account these goods that were produced but not sold. When the changes in business inventories are negative, some of the goods sold in a given period were produced in a previous period. For the same reason, we need to take this into account to obtain an accurate measure of economic activity for a GIVEN period.

Question 2

Define GNP and GDP. Explain the difference between GNP and GDP. Why is the difference between GNP and GDP small for most countries?

Answer 2

GDP is the total market value of all final goods and services produced within a given period by factors of production located within a country. GNP is the total market value of all final goods and services produced within a given period by factors of production owned by a country's citizens, regardless of where the output is produced. For most countries the difference between GNP and GDP is small because the payments of factor income to the rest of the world is approximately the same value as the receipt of factor income from the rest of the world.

Question 3

Explain what is meant by the concept of "value added" and how it can be used to calculate GDP.

Answer 3

Value added simply refers to the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage. If you add up the "value added" at each stage of the production process, the final value is equal to GDP.

Question 4

Based on the expenditure approach, discuss and explain each of the components of GDP.

Question 5

The Bahamas is a group of islands whose economy relies heavily on tourism. The majority of the hotels and resorts in the islands are owned by foreign countries. Which do you think is larger, Bahamas' GDP or GNP? Explain why.

Question 6

Suppose that your economics professor spent a week in Moscow delivering a series of lectures sponsored by the Russian government and a Russian professor spent a week in the U.S. delivering a series of lectures sponsored by your university. How would each of these events be reconciled in the U.S. and Russian GDP and GNP accounts?

Question 7

Why is a purely financial transaction not necessarily counted as part of gross domestic product?

Question 8

Next to each of the following items indicate in the table which items belongs to GDP and which to GNP.

Question 9

Explain the relationship among gross investment, net investment, and depreciation.

Question 10

Briefly explain under what condition, if any, net investment can be negative. If so, explain what this implies about the capital stock.

Question 11

Figure 21.1
Use Figure 21.1 which is a hypothetical production table showing the value of sales at each stage. From this information create a separate column showing the value added and determine the amount of that would be added to the official GDP of one gallon of gasoline.

Question 12

How can double counting be avoided?

Question 13

Why aren't intermediate goods counted in GDP?

Question 14

Using the above table, calculate the value added at each stage of the production process.

Question 15

Define residential investment.

Question 16

Many American companies that previously manufactured goods and services at home have increasingly relied on manufacturing facilities in China over the last twenty years. However, with the rise in diesel fuel prices this has increased the cost to domestic firms of importing these manufactured products. Some companies are discovering that the transportation costs are so great that it is tipping the balance in favor of making it more economical to build manufacturing facilities here in the United States. If many other firms follow suit what impact will this have on Gross Domestic Product?

Question 17

Define GDP in broad terms.

Question 18

Label the following as either being a final or intermediate good.

Question 19

Figure 21.2
Using the expenditure approach, calculate gross domestic product given Figure 21.2 above.

Question 20

What is the relationship between total production and sales? Explain.

Question 21

Give examples of indirect taxes.

Question 22

Explain what is meant by the expenditure approach to calculating GDP.

Question 23

Using the above data calculate GDP using the income approach and identify which two items on the list are superfluous in your calculation.
Difficulty: 2 Skill: Analytic Topic: GDP calculation
AACSB: Analytic Skills

Question 24

Explain how the term investment in economics is different from the way it is used in everyday life.

Question 25

Explain what is meant by the income approach to calculating GDP.

Question 26

Define national income and identify its five components.

Question 27

Explain the relationship between final sales in the economy and GDP. In addition, explain why it would be inaccurate to say that final sales and GDP are the same thing.

Question 28

Write out the formula for calculating GDP using the income approach.

Question 29

Define net investment and what it is meant to measure.

Question 30

Assume that in a given year there is negative inventory investment. What is the relationship between final sales and GDP? Comment on how this could be possible.

Question 31

What are subsidies? Give at least two examples.

Question 32

Explain what net exports are and why they are included in the definition of GDP.

Question 33

An automobile dealer purchases additional vehicles at the end of 1999 in anticipation of increased sales in January of 2000. How are these vehicles reconciled in the GDP accounts?

Question 34

Why do economists add depreciation to national income to calculate GDP when using the income approach but do not do so when using the expenditure approach?

Question 35

List and explain the four main spending groups in the economy.

Question 36

Thinking about inventory as investment is sometimes confusing. What service does inventory provide that would cause economists to count it as investment?

Question 37

Using the above figures, compute the subtotals for each of the four major spending categories and label them. Then compute the value of GDP.

Question 38

Explain what the phrase "net factor income to the rest of the world" means and explain why this item is added when using the income approach to calculate GDP.

Question 39

How is the capital stock at the end of the year determined?

Question 40

What are the three types of personal consumption expenditures? Explain and give an example of each.

Question 41

Write out the equation for calculating personal income as it relates to national income, retained corporate earnings, social insurance payments, personal interest income and transfer payments.

Question 42

Assume that GDP is $9 Trillion, receipts of factor income from the rest of the world are $2 Trillion, and payments of factor income to the rest of the world are $1 Trillion. Calculate GNP from this information.

Question 43

Explain why each of the following items is excluded from GDP: (a) profits from the stock and bond market (b) transfer payments (c) sale of used goods (d) goods and services produced in the home.Explain why the following items are included in GDP: (a) depreciation (b) change in business inventories( c) indirect taxes

Question 44

Explain the two approaches that can be used to compute GDP. Why do these two approaches lead to the same value for GDP?

Question 45

Explain the terms nominal GDP and real GDP.
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Question 46

Identify which of the following item (s) would be included in U.S. GDP. (a) The salary of an American consultant hired by a British firm to go and analyze their European operations (b) The output of a U.S.-owned family farm in Kansas (c) Food stamp payments (d) Welfare checks (e) The wages of a field worker in Louisiana

Question 47

Explain and define NNP.

Question 48

Refer to the information provided in Table 6.4 below to answer the questions that follow.

Answer Parts (a) through (g) using the information in Table 6.4 describing the Macrovian economy. Quantities are given in millions of Macrovian dollars (M$).
(a) Calculate gross private investment.
(b) Calculate Macrovian GDP.
(c) Calculate gross national product (GNP).
(d) Calculate net national product (NNP).
(e) Calculate national income.
(f) Calculate personal income.
(g) Calculate disposable personal income.

Question 49

Define disposable personal income.

Question 50

Write out the equation for calculating national income as derived from NNP.

Question 51

What does it mean when net factor income to the rest of the world is a positive figure?

Question 52

Explain the difference between GNP and NNP. Explain why NNP is sometimes a better measure of how the economy is doing than GNP is.

Question 53

If NNP is $7 trillion, net investment is $500 billion and gross investment is $1 trillion determine the level of GNP.

Question 54

Refer to the information provided in Table 6.5 below to answer the questions that follow.

Table 6.5 contains the national income and product accounts data on the Freedonia economy. Quantities following are given in millions of Freedonian dollars (F$). Use this information to answer Parts (a) through (g) below.
(a) Calculate Freedonian gross private investment.
(b) Calculate Freedonian GDP.
(c) Calculate Freedonian GNP.
(d) Calculate net national product (NNP).
(e) Calculate national income.
(f) Calculate personal income.
(g) Calculate disposable personal income.

Question 55

Using the above table calculate GNP, NNP, National Income, Personal Income and Disposable income.

Question 56

Explain in broad terms what personal income is.

Question 57

Assume that the government begins to spend more money on services that were previously produced in the private sector like health care. Why would this not necessarily increase the measured GDP?

Question 58

How are transfer payments reconciled in the national income and personal income accounts? Explain your reasoning.

Question 59

How are interest payments by households and government reconciled in the GDP accounts? Explain your reasoning.

Question 60

Assume that you are given GDP and depreciation data for 1998. Explain why this is not enough information to calculate Net National Product.

Question 61

Critically evaluate the following statement. "GDP is a proxy for the standard of living but not a direct measure."

Question 62

Explain in broad terms what the Bureau of Economic Analysis did to correct for the sensitivity of the choice of base years when calculating the percentage increase in Real GDP across time.

Question 63

Table 6. 1
Using Table 6.1 calculate the percentage increase in Real GDP from 1987 to 1988 using 1987 as the base year.

Question 64

If real GDP and nominal GDP both rise by 10% and 15% respectively from one year to the next what can we say is true about production and inflation between these two years and why?

Question 65

Explain what is meant by a fixed-weight procedure.

Question 66

What is the underground economy and what is its relationship if any to the value of GDP?

Question 67

Discuss some of the problems associated with using fixed weights to compute real GDP.

Question 68

Prostitution and illegal drug consumption are not included in the official GDP statistics. Is this necessarily a shortcoming?

Question 69

Table 6. 1
Using the above table calculate the nominal GDP for 1987.

Question 70

Table 6. 1
Using Table 6.1 calculate real GDP for 1988 using 1987 as the base year.

Question 71

Explain why real GDP may only rise even when the prices of large number of goods in the economy have fallen dramatically.

Question 72

Typically when there is growth in GDP this also means more energy consumption and more pollution as well. However, we often discover that rich nations have cleaner environments than poorer ones even though the former out produce the latter. Explain this apparent paradox.

Question 73

Evaluate the following statement. "GDP increases with polluting activities and then again with the clean up of these same activities."

Question 74

Table 6. 1
Using Table 6.1 calculate Real GDP in 1987 using 1988 as the base year.

Question 75

Explain why real GDP may fall even when the prices of large number of goods in the economy have increased enormously.

Question 76

List some limitations of GDP as a measurement of social welfare.

Question 77

Why should we care about the underground economy?

Question 78

Explain how using GDP may not be a very good measure of overall social welfare.

Question 79

If nominal GDP is $8 trillion and real GDP is $5 trillion, calculate the value of the GDP deflator.

Question 80

Table 6. 1
Using Table 6.1 calculate the percentage increase in Real GDP from 1987 to 1988 using 1988 as the base year.