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TRUE–FALSE QUESTIONS
1. National income accounting allows us to assess the performance of the economy and make policies
to improve that performance. T F
2. Gross domestic product measures at their market values the total output of all goods and services
produced in the economy during a year. T F
3. GDP is a count of the physical quantity of output and is not a monetary measure. T F
4. Final goods are consumption goods, capital goods, and services that are purchased by their end
users rather than being ones used for further processing or manufacturing. T F
5. GDP includes the sale of intermediate goods and excludes the sale of final goods. T F
6. The total value added to a product and the value of the final product are equal. T F
7. Social Security payments and other public transfer payments are counted as part of GDP. T F
8. The sale of stocks and bonds is excluded from GDP. T F
9. In computing gross domestic product, private transfer payments are excluded because they do not
represent payments for currently produced goods and services. T F
10. The two approaches to the measurement of the gross domestic product yield identical results
because one approach measures the total amount spent on the products produced by business
firms during a year while the second approach measures the total income of business firms during
the year. T F
11. Personal consumption expenditures only include expenditures for durable and nondurable goods.
T F
12. The expenditure made by a household to have a new home built is a personal consumption
expenditure. T F
13. In national income accounting, any increase in the inventories of business firms is included in gross
private domestic investment. T F
14. If gross private domestic investment is greater than depreciation during a given year, the
economy’s production capacity has declined during that year. T F
15. Government purchases include spending by all units of government on the finished products of
business, but exclude all direct purchases of resources such as labor. T F
16. The net exports of an economy equal its exports of goods and services less its imports of goods and
services. T F
17. The income approach to GDP includes compensation of employees, rents, interest income,
proprietors’ income, corporate profits, and taxes on production and imports. T F
18. Taxes on production and imports are the difference between gross private domestic investment
and net private domestic investment. T F
19. Net foreign factor income is the difference between the earnings of foreign-owned resources in the
United States and the earnings from U.S.-supplied resources abroad. T F
20. A GDP that has been deflated or inflated to reflect changes in the price level is called real GDP. T F
21. To adjust nominal GDP for a given year to obtain real GDP, it is necessary to multiply nominal GDP
by the price index (expressed in hundredths) for that year. T F
22. If nominal GDP for an economy is $11,000 billion and the price index is 110, then real GDP is
$10,000 billion. T F
23. GDP is a precise measure of the economic well-being of society. T F
24. The productive services of a homemaker are included in GDP. T F
25. The external costs from pollution and other activities associated with the production of the GDP
are deducted from total output. T F
1. National income accounting is valuable because it provides a means of keeping track of the level of
(unemployment, production) _______________ in the economy and the course it has followed over
the long run and the information needed to make public (policies, payments) _______________ that
will improve the performance of the economy.
2. Gross domestic product (GDP) measures the total (market, nonmarket) _______________ value of
all (intermediate, final) _______________ goods and services produced in a country (in 1 year, over
2 years) ______________.
3. GDP for a nation includes goods and services produced (within, outside) ______________ its
geographic boundaries. This condition means that the production of cars at a Toyota plant located in
the United States would be (included, excluded) ______________ in the calculation of U.S. GDP.
4. GDP is a (monetary, nonmonetary) ______________ measure that permits comparison of the
(relative, absolute) ______________ worth of goods and services.
5. In measuring GDP, only (intermediate, final) ___________ goods and services are included; if
_____________ goods and services were included, the accountant would be (over-, under-)
______________ stating GDP, or (single, multiple) ______________ counting.
6. GDP accounting excludes (production, nonproduction) ______________ transactions. These include
(financial, nonfinancial) ______________ transactions such as public or private transfer payments or
the sale of securities, and (first-, second-) ______________ hand sales.
7. Personal consumption expenditures are the expenditures of households for goods such as
automobiles, which are (durable, nondurable) ______________, and goods such as food, which are
______________, plus expenditures for (housing, services) ______________.
8. Gross private domestic investment basically includes the final purchases of (capital, consumer)
______________ goods by businesses, all (construction of new, sales of existing) ______________
buildings and houses, and changes in (services, inventories) ______________.
9. The difference between gross and net private domestic investment is equal to (depreciation, net
exports) ______________. If gross private domestic investment is greater than depreciation, net
private domestic investment is (positive, negative) ______________ and the production capacity of
the economy is (declining, expanding) ______________.
10. An economy’s net exports equal its exports (minus, plus)______________ its imports. If exports are
less than imports, net exports are (positive, negative) ______________, but if exports are greater
than imports, net exports are ______________.
11. Using the expenditure approach, the GDP equation equals ( NDP
NI
PI, C
Ig
G
Xn)
____________.
12. The compensation of employees in the system of national income accounting consists of actual
wages and salaries (plus, minus) ______________ wage and salary supplements. Salary supplements
are the payments employers make to Social Security or (public, private) _____________ insurance
programs and to _____________ pension, health, and welfare funds.
13. Corporate profits are disposed of in three ways: corporate income (taxes, interest)
______________, (depreciation, dividends) ______________, and undistributed corporate (taxes,
profits) ______________.
14. Three adjustments are made to national income to obtain (GDP, DI) ______________. Net foreign
factor income is (added, subtracted) ______________, a statistical discrepancy is ______________,
and the consumption of fixed capital is ______________.
15. Gross domestic product overstates the economy’s production because it fails to make allowance for
(multiple counting, depreciation) ______________ or the need to replace (consumer, capital)
______________ goods. When the adjustment is made, the calculations produce (net domestic
product, national income) ______________.
16. National income is equal to net domestic product (plus, minus) ______________ net foreign factor
income _____________, a statistical discrepancy. Personal income equals national income (plus,
minus) ______________ transfer payments ______________ the sum of taxes on production and
imports, Social Security contributions, corporate income taxes, and undistributed corporate profits.
Disposable income equals personal income (plus, minus) ______________ personal taxes.
17. A GDP that reflects the prices prevailing when the output is produced is called unadjusted, or
(nominal, real) ______________ GDP, but a GDP figure that is deflated or inflated for price level
changes is called adjusted or ______________ GDP.
18. To calculate a price index in a given year, the combined price of a market basket of goods and
services in that year is (divided, multiplied) ______________ by the combined price of the market
basket in the base year. The result is then ______________ by 100.
19. Real GDP is calculated by dividing (the price index, nominal GDP) ______________ by
______________. The price index expressed in hundredths is calculated by dividing (real, nominal)
_____________ GDP by _____________ GDP.
20. For several reasons, GDP has shortcomings as a measure of total output or economic well-being.
a. It does not include the (market, nonmarket) ______________ transactions that result in the
production of goods and services or the amount of (work, leisure) ______________ of
participants in the economy.
b. It fails to record improvements in the (quantity, quality) ______________ of the products
produced, or the changes in the (level, composition) ______________, and distribution of the
economy’s total output.
c. It does not take into account the undesirable effects of GDP production on the (government,
environment) ______________ or the goods and services produced in the (market,
underground) ______________ economy.
PROBLEMS
1. Following are national income accounting figures for the United States.
a. In the following table, use any of these figures to prepare an income statement for the economy
similar to the one found in Table 24.3 of the text.
b. Use the other national accounts to find
(1) Net domestic product is $_____________________
(2) National income is $_________________________
(3) Personal income is $_________________________
(4) Disposable income is $_______________________
2. A farmer owns a plot of ground and sells the right to pump crude oil from his land to a crude oil
producer. The crude oil producer agrees to pay the farmer $50 a barrel for every barrel pumped
from the farmer’s land.
a. During one year 10,000 barrels are pumped.
1. The farmer receives a payment of $________ from the crude oil producer.
2. The value added by the farmer is $________.
b. The crude oil producer sells the 10000 barrels pumped to a petroleum refiner at a price of $110 a
barrel.
(1) The crude oil producer receives a payment of $________ from the refiner.
(2) The value added by the crude oil producer is $________.
c. The refiner employs a pipeline company to transport the crude oil from the farmer’s land to the
refinery and
pays the pipeline company a fee of $5 a barrel for the oil transported.
(1) The pipeline company receives a payment of $________ from the refiner.
(2) The value added by the pipeline company is $________.
d. From the 10,000 barrels of crude oil, the refiner produces 400,000 gallons of gasoline which is
sold to
distributors and gasoline service stations at an average price of $3.50 per gallon.
(1) The total payment received by the refiner from its customers is $________.
(2) The value added by the refiner is $________.
e. The distributors and service stations sell the 400,000 gallons of gasoline to consumers at an
average price of $3.75 a gallon.
(1) The total payment received by distributors and service stations is $________.
(2) The value added by them is $________.
(3) The total of the value added by the farmer, crude oil producer, pipeline company, refiner, and
distributors and service stations is $________, and the market value of the gasoline sold to
customers (the final good) is $________.
3. Following is a list of items which may or may not be included in the five income-output measures of
the national income accounts (GDP, NDP, NI, PI, DI). Indicate in the space to the right of each which
of the income-output
measures includes this item; it is possible for the item to be included in none, one, two, three, four,
or all of the
measures. If the item is included in none of the measures, indicate why it is not included.
a. Interest on the national debt __________________
b. The sale of a used computer __________________
c. The production of shoes that are not sold by the manufacturer
________________________________
d. The income of a dealer in illegal drugs ____________________________________________
e. The purchase of a share of common stock on the New York Stock Exchange
______________________
f. The interest paid on the bonds of the General Electric, a corporation __________________________
g. The labor performed by a homemaker __________________________________________
h. The labor performed by a paid babysitter ___________________________________________
i. The monthly check received by a college student from her parents
______________________________
j. The purchase of a new tractor by a farmer ____________________________________________
k. The labor performed by an assembly line worker in repapering his own kitchen
_____________________
l. The services of a lawyer _____________________
m. The purchase of shoes from the manufacturer by a shoe retailer
_________________________________
n. The monthly check received from the Social Security Administration by a college student whose
parents have died ___________________________________
o. The rent a homeowner would receive if she did not live in her own home
__________________________
4. Following is hypothetical data for a market basket of goods in year 1 and year 2 for an economy.
a. Compute the expenditures for year 1.
b. Compute the expenditures for year 2.
c. In the space below, show how you computed the GDP price index for year 2.
______________________
5. The following table shows nominal GDP figures for 3 years and the price indices for each of the 3
years. (The GDP figures are in billions.)
a. Use the price indices to compute the real GDP in each year. (You may round your answers to
the nearest
billion dollars.) Write answers in the table.
b. Which of the 3 years appears to be the base year?
____________________________________________
c. Between (1) 1929 and 1933 the economy experienced (inflation,
deflation)__________________________.
(2) 1933 and 1939 it experienced _____________________.
d. The nominal GDP figure
(1) for 1929 was (deflated, inflated, neither) __________.
(2) for 1933 was _______________________________.
(3) for 1939 was________________________________.
e. The price level
(1) fell by ___________________% from 1929 to 1933.
(2) rose by __________________% from 1933 to 1939.
SHORT ANSWER AND ESSAY QUESTIONS
1. Of what use is national income accounting to economists and policymakers?
2. What is the definition of GDP? How are the values of output produced at a U.S.-owned factory in
the United States and a foreign-owned factory in the United States treated in GDP accounting?
3. Why is GDP a monetary measure?
4. How does GDP accounting avoid multiple counting and exaggeration of the value of GDP?
5. Why does GDP accounting exclude nonproduction transactions?
6. What are the two principal types of nonproduction transactions? List examples of each type.
7. What are the two sides to GDP accounting? What are the meaning and relationship between the
two sides?
8. What would be included in personal consumption expenditures by households?
9. How is gross private domestic investment defined?
10. Is residential construction counted as investment or consumption? Explain.
11. Why is a change in inventories an investment?
12. How do you define an expanding production capacity using the concepts of gross private domestic
investment and depreciation?
13. What do government purchases include and what do they exclude?
14. How are imports and exports handled in GDP accounting?
15. What are six income components of GDP that add up to national income? Define and explain the
characteristics of each component.
16. What are the three adjustments made to the national income to get it to equal GDP? Define and
explain the characteristics of each one.
17. Explain how to calculate net domestic product (NDP), national income (NI), personal income (PI),
and disposable income (DI).
18. What is the difference between real and nominal GDP? Describe two methods economists use to
determine real GDP. Illustrate each method with an example.
19. Describe the real world relationship between nominal and real GDP in the United States. Explain
why nominal GDP may be greater or less than real GDP depending on the year or period selected.
20. Why might GDP not be considered an accurate measure of total output and the economic wellbeing of society? Identify seven shortcomings of GDP.