chap 5

Question 1

What is each firm’s contribution to total output?

Answer 1

Value added= revenues-non labour costs
= revenues-cost of interm. goods = payments to factors of production

Question 2

3 methods for measuring national income

Answer 2

value added
expenditures
income
—» they should yield the same GDP

Question 3

Explain investment expenditure

Answer 3

Expenditure on goods not for present consumption:
- inventories
- plant and equipment
- residential housing
Net inv= gross inv- depreciation
Ia denotes gross investment

Question 4

Explain govt purchases

Answer 4

purchase of currently produced goods by the government
- excluding transfer payments
- valued at cost

Question 5

Explain income side approach and how its calculated

Answer 5

factor incomes:
- wages
- rent, interest, profits
This in net domestic income

NOn-factor payments:
- indirect taxes (net of subsidies)
- depreciation of existing physical capital

GDP= net domestic income+ indirect taxes(less subsidies)+depreciation

Question 6

What is the difference between GDP and GNP

Answer 6

The difference between GDP and GNP is the difference
between income produced and income received

example :

Toyota factory located in Canada:
Value Added: $100 from these $5 remitted to foreign owners
GDP takes into account $100 as result of that production.
GNP takes into account $95, income for Canadian citizens.
Canadian-owned business located outside of Canada:
Value Added: $100 from these $5 remitted to Canada
GDP of the foreign country takes into account $100.
Canada GNP takes into account $5.

Question 7

What is GDP better for and what is GNP better for

Answer 7

• GDP is superior as a measure of domestic economic activity.
• GNP is superior as a measure of living standards of residents.

Question 8

What is a more refined measure that resembles GNP

Answer 8

disposable personal income:
* It equals GNP minus:
– any part not actually paid to households
– personal income taxes
– plus transfer payments received by households

Question 9

What is the GDP deflator and why is it useful

Answer 9

Basically nominal/real *100 , number you have to divide nominal by to get real
GDP deflator implicitly defines a price index
* The GDP deflator is a comprehensive index of prices because
it includes the prices of all goods and services produced in the
country.

Question 10

Do the CPI and the GDP deflator move together?

Answer 10

Not necessarily.
* Because CPI tracks consumer prices and GDP deflator tracks
the prices of goods produced in Canada, there will be some
differences.

Question 11

To what extent does GDP provide a useful measure of our
living standards?

Answer 11

Changes in real per capita income are a good measure of
average material living standards.
– But material living standards are only part of what most
people consider their overall well-being.

Question 12

What a better indicator of living standards?

Answer 12

Human development index:
* This measure includes a large number of factors that
contribute to human welfare. GDP is only one such factor.
* Others include crime rates, pollution, congestion,
longevity, scenic beauty, income distribution, educational
achievement, and political freedom.