Download chapter 7 - Spring Branch ISD

CHAPTER 7
Measuring Domestic Output,
National Income, and the Price Level
A. Short-Answer, Essays, and Problems
1. Of what use is national income accounting to economists and to policy makers?
2. Define GDP and its characteristics.
3. What is the definition of GDP? How would the value of output produced at an
American-owned factory in the U.S. and a foreign-owned factory in the U.S. be treated
in GDP accounting?
4. Why is GDP a monetary measure?
5. Explain the difference between final and intermediate goods, and give an example of
each.
6. Why do economists worry about “multiple counting” and calculate only the “value
added” in the production process?
New 7. What is the value added by all the firms A–E from the production of a product as
described below? What did each firm add separately in value and what does it total?
Stage of production
Firm A
Firm B
Firm C
Firm D
Firm E
Sales value of product
$1,600
2,500
3,700
5,200
7,600
8. Identify at least four transactions and other variables which are not included in the Gross
Domestic Product.
9. Define the four categories of expenditures which comprise GDP.
10. Give the three categories which comprise gross investment and explain the difference
between them.
11. Net investment can be positive, negative, or zero, but gross investment can never be less
than zero. Explain.
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New 12. Explain what is and what is not included in government purchases in GDP.
13. Define net exports.
New 14. What are the components of national income? What is the relative share going to wages
and salaries and to corporate profits?
New 15. What adjustments need to be made to go from national income to GDP?
16. How does NDP differ from GDP?
17. How does the personal income measure differ from the disposable income measure?
New 18. The following is a list of figures for a given year in billions of dollars. Using this data,
compute: (a) GDP; (b) NDP; (c) NI; (d) PI; (e) DI; (f) Net exports.
Transfer payments ............................................... $ 16
Government purchases ............................................ 80
Personal taxes .......................................................... 38
Corporate income taxes ........................................... 28
Indirect business taxes ............................................. 15
Social security contributions ..................................... 8
Undistributed corporate profits ............................... 19
Proprietor’s income ................................................. 25
Compensation of employees ................................. 258
Personal consumption expenditures ...................... 322
Consumption of fixed capital .................................... 4
Rents ....................................................................... 10
U.S. exports ............................................................. 14
Corporate profits ..................................................... 70
Interest ..................................................................... 12
Dividends ................................................................ 23
Imports to U.S. ........................................................ 17
Gross private domestic investment.......................... 63
Net foreign factor income earned in the U.S. .......... 10
19. Which of the following are included and which are excluded in calculating this year’s
GDP? Explain in each instance.
(a) A monthly scholarship check received by an economics student
(b) The purchase of a new corncrib by a farmer
(c) The purchase of a used tractor by a farmer
(d) The cashing in of a savings bond
(e) The services of a mechanic in fixing the radiator in his own car
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Measuring Domestic Output, National Income, and the Price Level
(f) Social security checks received by a retired person
(g) An increase in business inventories
(h) Government purchase of missiles
(i) A barber’s income
(j) Income received from interest on a corporate bond
(k) Cash received from selling a corporate bond
20. How is a price index computed?
21. Differentiate between nominal and real GDP.
22. The following table shows the price of a specific stereo receiver for a five-year period.
Using year 3 as the base year, calculate the price index for each year.
Year
1
2
3
4
5
Price
$ 88
$100
$120
$132
$140
Price index
___
___
___
___
___
New 23. The next four questions refer to the following price and output data over a five-year
period for an economy that produces only one good. Assume that year 2 is the base
year.
Year
1
2
3
4
5
Units of
output
16
20
30
36
40
Price
per unit
$2
3
4
5
6
(a) If year 2 is the base year, give the price index for year 3.
(b) Give the nominal GDP for year 4.
(c) What is the real GDP for year 4?
(d) Tell which years you would deflate nominal GDP and which years you would
inflate nominal GDP in finding real GDP.
24. What are the two basic ways of deriving real GDP from nominal GDP?
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Chapter 7
25. The following table shows the price of a specific stereo receiver for a five-year period.
Using Year 1 as the base year, calculate the price index for each year.
Year
1
2
3
4
5
Price
Price index
(answers using
Year 1 = 100)
$112
144
160
176
200
___
___
___
___
___
26. What is the relationship between real GDP, nominal GDP, and the price index?
27. The following data show nominal GDP and the appropriate price index for several years.
Compute real GDP for each year and indicate whether you have “inflated” or “deflated”
nominal GDP in finding real GDP. All GDP are in billions.
Year
1
2
3
4
5
6
Nominal
GDP
$117
124
143
149
178
220
Price level
index
120
104
85
96
112
143
Real GDP
___
___
___
___
___
___
Inflated (I)
Deflated (D)
___
___
___
___
___
___
28. What is the consumer price index? How does it differ from the GDP index?
29. Discuss the merits and demerits of GDP as a measure of the economy’s output
performance and as a measure of its standard of living.
30. A witness told a congressional committee that if the United States doubled its real GDP,
it would be a much less livable society than it is today. Explain this view.
31. The expanding “underground” economy creates problems for economic policy makers.
Explain.
New 32. (Last Word) Where do government economists get the data for the national income
accounts?
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