Ch. 2

Question 1

3 approaches to national income accounting

Answer 1

product, income, expenditure

all 3 are identical measurements of econ activity

Question 2

product approach

Answer 2

adds market value of good produced, excluding goods used up in intermediate production stages

Question 3

value-added concept

Answer 3

in product approach, sums value added rather than output

value added of producer = value of output - value of inputs it purchased from other producers

Question 4

income approach

Answer 4

adds income received by producers of output, including wages received by workers & profits received by firm owners

Question 5

expenditure approach

Answer 5

adds amount spent by all ultimate users of output

Question 6

fundamental identity of national income accounting

Answer 6

total production = total income = total expenditure

market value –> product & expenditure must be equal
what seller receives = what buyers spend –> expenditure & income must be equal

Question 7

GDP

Answer 7

market value of final goods newly produced in a nation during a fixed period of time, taking place WITHIN a country

Question 8

why use market value for GPD?

Answer 8

takes into account differences in economic importance of different goods (allows adding production of different goods)

Question 9

problems with using market values for GDP?

Answer 9

some nonmarket goods are ignored (ex. underground econ)

Question 10

GNP

Answer 10

market value of final goods newly produced by DOMESTIC factors of production

Question 11

NFP

Answer 11

net factor payments from abroad
GNP - GDP
income paid to domestic FOP by world - income paid to foreign FOP by domestic econ

Question 12

GDP =

Answer 12

GNP - NFP

Question 13

income-expenditure identity

Answer 13

Y = C + I + G + E

Question 14

I =

Answer 14

spending for new capital goods, increases in inventory holdings, business fixed investment ( buildings, equip), residential (houses, apartments

Question 15

G =

Answer 15

any gov expenditure for currently produced foreign/domestic good, DOES NOT include payments on national debt or transfers (bc transfers aren’t an exchange for a good)

Question 16

GDP under income approach =

Answer 16

added incomes received by producers (including profits) + taxes paid to gov

Question 17

private disposable income =

Answer 17

Y + NFP + TR + INT - T

Question 18

net gov income =

Answer 18

T - TR - INT

Question 19

private disposable income + net gov income =

Answer 19

= Y + NFP

= GNP

Question 20

saving rate

Answer 20

saving/income

Question 21

private saving

Answer 21

= private disposable income - consumption

= (Y + NFP - T + TR + INT) - C

Question 22

government saving

Answer 22

= net gov income - gov purchases

= (T - TR - INT) - G

Question 23

why is I not subtracted from private saving?

Answer 23

bc I is used to enhance future productivity instead of satisfying current needs

Question 24

national saving

Answer 24

= Y + NFP - C - G

Question 25

uses of private saving

Answer 25

fund new capital investment, provide resources for gov to finance budget deficits, acquire assets from or lend to foreigners

Question 26

current account balance

Answer 26

= NX + NFP
payments received from abroad in exchange for currently produced goods - analagous payments made to foreigners by domestic econ

Question 27

private saving =

Answer 27

I + (- Sgov) + CA

Question 28

national wealth consists of

Answer 28

1. country’s domestic physical assets
2. net foreign assets

domestic financial assets held by domestic residents NOT a part of national wealth

Question 29

net foreign assets =

Answer 29

country’s foreign assets - foreign liabilities