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Chapter 15
Gross Domestic Product
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2002 South-Western College Publishing
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Who was
Simon Kuznets?
He explained the first
national accounting system
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What is gross
domestic product?
GDP is the most widely
reported measure of a
nation’s economic
performance
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What does GDP
measure?
The market value of all
final goods and
services produced in a
nation during a period
of time, usually a year
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What is gross national
product (GNP)?
GNP measures the market
value of all final goods and
services produced by a
nation’s residents, no matter
where they are located
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What is an advantage
of using GDP?
GDP measures value
using dollars, rather than
a list of the number of
goods and services
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Does GDP measure
secondhand
transactions?
No, Current GDP does not
include the sale of a used
car or the sale of a home
constructed some years ago
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What are
intermediate goods?
Goods and services used
as inputs for production
of final goods
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Does GDP count
intermediate goods?
No, to avoid double
counting, GDP only
measures final goods and
services
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What are final goods?
Finished goods and
services produced
for the ultimate user
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Does GDP measure
nonproductive
financial transactions?
No, GDP does not count
purely private or public
financial transactions
such as giving gifts,
stocks, bonds, or
transfer payments
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What is a
transfer payment?
A government payment to
individuals, not in
exchange for goods or
services currently produced
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Does GDP measure the
whole economy?
Yes, GDP consists of
many puzzle pieces to fit
together, including
markets for products,
resources, consumers,
workers, and businesses
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What is a
circular flow model?
A model that show us
how all the pieces of
the puzzle fit together
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Product
markets
Basic
Circular
Businesses Flow Households
Model
Factor
markets
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What is a flow?
A rate of change in a
quantity during a
given time period
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What is a stock?
A quantity measured
at one point in time
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What additional
sectors does a
complex circular flow
model contain?
• Financial markets
• Government
• Foreign markets
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What leakages are
present in the more
complex model?
• Household saving
• Household taxes paid
• Income spent on imports
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What injections are
present in the more
complex model?
• Business spending
• Government spending
• Foreign spending
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What point is
the economy
tending toward?
Where the dollar value of
leakages equals the
dollar value of injections
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What are the two
approaches we use to
measure GDP?
Expenditure
Income
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What is the
expenditure approach?
The national income
accounting method that
measures GDP by adding
all the spending for final
goods and services
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What are the four
sectors of GDP?
• Consumption
• Investment
• Government
• Foreign (X - M)
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GDP = C + I + G + (X - M)
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What is the
income approach?
The method that
measures GDP by
adding all incomes
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What are the Income
components of GDP?
GDP = Compensation of
employees + rents +
profits + net interest +
nonincome adjustments
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What are
nonincome
adjustments?
• Capital consumption
allowances
• Indirect business taxes
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What is compensation
of employees?
Income earned from
wages, salaries, and
certain supplements
paid to labor
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What is rental
income of persons?
Rent and royalties
received by property
owners who permit
others to use their assets
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What are profits?
Proprietors income
Corporate profits
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What is net interest?
Interest earned from
loans to businesses
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What is depreciation?
An allowance for the
capital worn out
producing GDP
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What are indirect
business taxes?
Taxes levied as a
percentage of the prices of
goods sold and therefore
become a part of the
revenue received by firms
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What are
shortcomings of GDP?
• Nonmarket transactions
• Distribution, kind, &
quality of products
• Neglect of leisure time
• Underground economy
• Economic bads
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What other national
accounts measure
economic performance?
• Net National Product
• National Income
• Personal Income
• Disposable Personal Income
• Nominal and Real GDP
• GDP Chain Price Index
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What is Net
Domestic Product?
NDP is GDP minus
depreciation of the
capital worn out in
producing output
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What is
national income?
NI is the total earned by
resource owners,
including wages, rents,
interest, and profits
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What is
personal income?
PI is the total income
received by households
that is available for
consumption, saving,
and payment of
personal taxes
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What is disposable
personal income?
DI is the amount of
income that households
have to spend or save
after payment of
personal taxes
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What is nominal GDP?
The value of all final
goods based on the
prices existing during
the time period of
production
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What is real GDP?
The value of all final
goods produced during a
given time period based
on the prices existing in a
selected base year
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Real GDP =
nominal GDP x 100
GDP price index
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What is the
chain price index?
A measure that compares
changes in the prices of
all final goods during a
given period to the
prices of those goods in
a base year
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Key Concepts
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Key Concepts
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Who was Simon Kuznets?
What is Gross Domestic Product?
What does GDP measure?
What is an advantage of using GDP?
Does GDP measure the whole economy?
What are the two approaches we use to
measure GDP?
• What is the expenditure approach?
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Key Concepts cont.
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What are the four sectors of GDP?
What is the income approach?
What are the income components of GDP?
What are nonincome adjustments?
What are shortcomings of GDP?
What is Net Domestic Product?
What is national income?
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Summary Key Concepts
cont.
•
•
•
•
•
What is personal income?
What is disposable personal income?
What is nominal GDP?
What is real GDP?
What is the chain price index?
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Summary
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GDP is the most widely used
measure of a nation’s economic
performance. GDP is the market
value of all final goods produced
in the U.S. during a period of time
regardless of who owns the
factors of production.
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GNP is the market value of final
goods and services produced
by U.S. residents, no matter
where they are located.
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The circular flow model is a
diagram representing the flow of
products and resources between
businesses and households in
exchange for money payments.
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Flows must be distinguished
from stocks. Flows are
measured in units per time
period, for example, dollars per
year. Stocks are quantities that
exist at a given point in time
measured in dollars.
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Product
markets
Basic
Circular
Businesses Flow Households
Model
Factor
markets
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The expenditure approach sums
the four major spending
components of GDP:
consumption, investment,
government, and net exports.
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The income approach sums the
major income components of GDP,
consisting of compensation of
employees, rents, profits net
interest and nonincome expenses
for depreciation and indirect
business taxes.
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Net domestic product (NDP) is
GDP minus depreciation
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National income (NI) is total
income earned by households
and is calculated as NDP minus
indirect business taxes.
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Personal income (PI) is the total
income received by households
and is calculated as NI minus
corporate taxes and Social Security
taxes plus transfer payments, net
interest, and dividends.
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Disposable personal income (DI)
is personal income minus
personal taxes. DI is the amount
of income a household has
available to consume or save.
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Nominal GDP measures all final
goods and services produced in a
given time period of production.
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Real GDP measures all final
goods and services produced in a
given time period, valued at the
prices existing in a base year.
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The GDP chain price index is a
broad price index used to convert
nominal GDP to real GDP.
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Chapter 15 Quiz
©2002South-Western College Publishing
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1. The dollar value of all final goods and
services produced within the borders of a
nation is the
a. GNP deflator.
b. gross national product.
c. net national product.
d. gross domestic product.
D. GDP is the most widely reported
measure of a nation’s economic
performance. GDP excludes
production abroad by U.S. firms.
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2. Based on the circular flow model,
money flows from businesses to
households in
a. factor markets.
b. product markets.
c. neither factor nor product markets.
d. both factor and product markets.
A. Money flows from household
to businesses in product
markets. The reverse is true for
factor markets.
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3. The circular flow model does not
include which of the following?
a. The quantity of shoes in inventory
on January 1.
b. The total wages paid per month.
c. The percentage of profits paid out
as dividends each year.
d. The total profits earned per year
in the U.S. economy.
A. The quantity of shoes in inventory
is a stock at one point in time rather
than a flow over a period of time.
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4. The expenditure approach measures
GDP by adding all the expenditures
for final goods made by
a. households.
b. businesses.
c. government.
d. all of the above.
E. One method national income
accountants use to calculate CDP is
to add all spending for the four
sectors of the economy during a
period of time.
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5. GDP is a less-than-perfect measure of
the nation’s economic pulse because it
a. excludes nonmarket transactions.
b. does not measure the quality of
goods and services.
c. does not report illegal transactions.
d. all of the above.
e. none of the above.
D. GDP only measures legal market
transactions and adjustments for
quality changes are very difficult or
impossible.
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6. Subtracting an allowance for
depreciation of fixed capital from
gross domestic product yields
a. real GDP.
b. nominal GDP.
c. national income.
d. net national product.
D. Real GDP and nominal GDP
include an estimate of
depreciation. National income is
equal to net national product less
indirect business taxes (e.g. sales
taxes, federal excise taxes).
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7. Adding all incomes earned by
households from the sale of resources
yields
a. intermediate goods.
b. indirect business taxes.
c. national income.
d. personal income.
C. Intermediate goods and indirect
business taxes have nothing to do
with adding incomes. Personal
income is the total income received
by households. For example, PI
includes transfer payments and NI
does not.
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8. Personal income equals disposable
income plus
a. personal savings.
b. transfer payments.
c. dividend payments.
d. personal taxes.
D. Disposable income is the amount of
income that households actually have
to spend or save after payment of
personal taxes.
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9. Disposal personal income
a. is the income people spend for
personal items such as homes and
cars.
b. includes transfer payments.
c. excludes transfer payments.
d. includes personal taxes.
B. DPI equals PI minus personal
taxes. Since PI includes transfer
payments, DPI also includes
transfer payments.
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10. Which of the following statements is true?
a. Leakages in an economy equal savings plus
taxes plus imports.
b. National income is total income earned by
households, whereas personal income is total
income received by households.
c. Disposable personal income equals personal
income minus personal taxes.
d. The expenditures approach and the income
approach yield the same GDP figure.
e. all of the above are true.
E. When money leaves the system, a leakage
occurs. Personal income is both earned and
unearned income. Disposable income is income
left over after taxes. Expenditures will always
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equal income.
11. Gross domestic product data that
reflect actual prices as they exist in a
given year are expressed in terms of
a. fixed dollars.
b. current dollars.
c. constant dollars.
d. real dollars.
B. Nominal GDP is also referred to as
current dollar or money GDP and is
not adjusted for inflation.
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12. The GDP chain price index is
a. widely reported in the news.
b. broadly based.
c. adjusted for government spending.
d. a measure of changes in consumer
prices.
B. The GDP chain price index not only
measures price changes of consumer
goods, but also price changes of
business investment, government
consumption expenditures, exports
and imports.
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13. Which of the following statements is true?
a. The inclusion of intermediate goods and
services in GDP calculations would
underestimate our nation’s production
level.
b. The expenditures approach sums the
compensation of employees, rents,
profits, net interest, and non-income
expenses for depreciation and indirect
business taxes.
c. Real GDP has been adjusted for inflation
or deflation.
d. Real GDP equals nominal GDP multiplied
by the GDP deflator.
C. The word real in front of any term
means that the value has been adjusted.
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END
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