Chapter 7: Measuring Domestic Output and National Income

Question 1

What is the purpose of national income accounting?

Answer 1

To measure the economy’s performance, monitor growth, and adjust policies as needed.

Question 2

What is GDP (Gross Domestic Product)?

Answer 2

The dollar value of all final goods and services produced within a country’s borders in a specific time period.

Question 3

Why does GDP count only final products?

Answer 3

To avoid double-counting by excluding intermediate goods.

Question 4

What is the importance of using a monetary measure in GDP?

Answer 4

It allows aggregation of diverse goods/services using a common unit for comparison.

Question 5

What is Gross Output (GO), and how does it differ from GDP?

Answer 5

GO measures sales across all production stages, while GDP counts only final product values.

Question 6

What is “value added” in the context of GDP?

Answer 6

It is the market value of output minus the cost of purchased inputs at each production stage.

Question 7

What is Gross Output (GO), and how does it differ from GDP?

Answer 7

GO measures sales across all production stages, while GDP counts only final product values.

Question 8

Why must nonproduction transactions be excluded from GDP?

Answer 8

They don’t contribute to current production (e.g., financial transfers, secondhand sales).

Question 9

What are the two methods for calculating GDP?

Answer 9

The expenditures approach and the income approach.

Question 10

What is the expenditures approach formula for GDP?

Answer 10

GDP = C (Consumption) + Ig (Gross Investment) + G (Government Purchases) + Xn (Net Exports).

Question 11

What does the income approach to GDP include?

Answer 11

Wages, rents, interest, profits, taxes on production/imports, minus net foreign factor income, plus depreciation and statistical adjustments.

Question 12

What are the three main categories of Personal Consumption (C)?

Answer 12

Durable goods, nondurable goods, and services.

Question 13

What is the largest component of Personal Consumption?

Answer 13

Services, making up ~60%.

Question 14

Why are changes in inventories included in Gross Investment (Ig)?

Answer 14

They represent unconsumed output, contributing to the capital stock.

Question 15

What does Government Purchases (G) include?

Answer 15

Spending on goods/services for public use, investments in public capital, and R&D.

Question 16

How are Net Exports (Xn) calculated?

Answer 16

Net Exports = Exports (X) - Imports (M).

Question 16

What is the largest component of national income?

Answer 16

Compensation of employees, including wages, salaries, and employer benefits.

Question 17

What is Proprietors’ Income?

Answer 17

Net income of unincorporated businesses (e.g., sole proprietorships).

Question 18

What are the three categories of Corporate Profits?

Answer 18

Corporate taxes, dividends, and retained earnings.

Question 19

What are Taxes on Production and Imports?

Answer 19

Sales taxes, excise taxes, property taxes, license fees, and customs duties.

Question 20

What does National Income (NI) measure?

Answer 20

All income earned through the use of U.S.-owned resources, plus taxes on production and imports.

Question 21

How is Net Domestic Product (NDP) calculated?

Answer 21

NDP = GDP - Depreciation.

Question 22

Why is NDP significant?

Answer 22

It measures output available for consumption or reinvestment without reducing future production capacity.

Question 23

How is National Income (NI) calculated?

Answer 23

NI = NDP - Statistical Discrepancy + Net Foreign Factor Income.

Question 24

What does Personal Income (PI) represent?

Answer 24

All income received by households, including transfer payments.

Question 25

How is Disposable Income (DI) calculated?

Answer 25

DI = Personal Income (PI) - Personal Taxes.

Question 26

Why can’t nominal GDP be compared over time?

Answer 26

Because inflation/deflation affects the value of money.

Question 27

What is the difference between nominal and real GDP?

Answer 27

Nominal GDP is measured at current prices, while real GDP is adjusted for price changes.

Question 28

How do you convert nominal GDP to real GDP?

Answer 28

Real GDP = (Nominal GDP) ÷ (Price Index / 100).

Question 29

What is the purpose of a price index?

Answer 29

To measure price changes relative to a base year for inflation adjustment.

Question 30

What are nonmarket activities, and how do they affect GDP?

Answer 30

Tasks without market transactions (e.g., stay-at-home parenting) are excluded, understating total output.

Question 31

What is the underground economy?

Answer 31

Unreported legal/illegal transactions that are not included in GDP, leading to underestimation of output.

Question 32

How does GDP overlook environmental costs?

Answer 32

GDP includes cleanup costs but doesn’t account for pollution’s negative effects, overstating well-being.

Question 33

What societal factors does GDP fail to capture?

Answer 33

Leisure, income distribution, product quality improvements, and social well-being.

Question 34

What is hedonic adjustment?

Answer 34

A method to account for quality improvements in GDP by breaking products into attributes (e.g., smartphone features).

Question 35

How do free services like Google impact GDP?

Answer 35

Free services aren’t directly included in GDP but hold significant unmeasured value.

Question 36

Why does GDP not fully reflect economic well-being?

Answer 36

It focuses on production and market transactions, excluding factors like crime reduction, health, and happiness.

Question 37

What are the four sectors in the circular flow model?

Answer 37

Households, businesses, government, and the foreign sector.

Question 38

How does the foreign sector impact GDP?

Answer 38

Through net exports, which balance U.S. exports and imports.

Question 39

What is the difference between GDP and Gross Output (GO)?

Answer 39

GDP measures final goods/services; GO includes all production stages for a fuller economic view.

Question 40

What is the role of inventories in GDP?

Answer 40

Changes in inventories indicate production not yet consumed, adding to investment.

Question 41

What are R&D expenditures classified as in GDP?

Answer 41

Investment, as they contribute to innovation and economic growth.

Question 42

How do durable and nondurable goods differ in GDP?

Answer 42

Durable goods last >3 years (e.g., cars); nondurable goods are consumed quickly (e.g., food).

Question 43

What is Consumption of Fixed Capital?

Answer 43

Depreciation, reflecting wear and tear on physical assets over time.

Question 44

Why are imports subtracted in GDP?

Answer 44

They represent foreign-produced goods, not part of domestic output.

Question 45

How does GDP handle statistical discrepancies?

Answer 45

A balancing adjustment accounts for differences between expenditure and income approaches.

Question 46

Why does GDP measure market transactions only?

Answer 46

Market prices provide objective value, unlike nonmarket activities.

Question 47

How does GDP treat leisure?

Answer 47

Leisure time is excluded, even though it improves quality of life.

Question 48

What is the relationship between Net Investment and economic growth?

Answer 48

Positive net investment indicates growth in the capital stock.

Question 49

How does GDP treat government transfer payments?

Answer 49

They’re excluded since they don’t reflect current production.

Question 50

What is National Income (NI) primarily composed of?

Answer 50

Employee compensation, rents, interest, proprietors’ income, corporate profits, and taxes on production/imports.

Question 51

What is the significance of Disposable Income (DI)?

Answer 51

It represents what households can spend or save, influencing economic activity.