Chapter 14

Question 1

What does the accounting of GDP and GNI enable economists and policymakers to do?

Answer 1

• Assess the health of the economy by comparing level of productions at regular intervals
• Track the long-run course of the economy to examine weather the growth has been constant or declined
• Formulate policies that will safeguard and improve the economies health such as fiscal policy (FP) and monetary policies (MP)

Question 2

What is the aggregate output?

Answer 2

The aggregate output is its annual total output of goods and services. Aggregate output is called the Gross domestic product

Question 2

What is real GDP?

Answer 2

Real GDP takes into account price changes that are deflated or inflated to reflect changes in the price level, these adjustments give a measure of GDP for various years, adjusting the rand to the same as it was in some reference year.

Question 3

What is nominal GDP?

Answer 3

Nominal GDP does not take into account price changes; it is based on the prices that prevailed when the output was produced (unadjusted)

Question 4

What are the short comings of calculating GDP?

Answer 4

• Non market activities - GDP understates a nation’s total output
• The informal sector which don’t declare their income
• It doesn’t take into account improved product quality- GDP is a quantitative measure rather than a qualitative measure, it fails to capture the full value of improvements in product quality
• The national wellbeing - the social costs of the negative by-products reduce our economic well-being. GDP overstates our national well-being
• Composition and distribution of the output - GDP reveals nothing about the way output is distributed
• Non-economic sources of wellbein

Question 5

What is GDP?

Answer 5

Gross domestic product (GDP) is the total market value of all final goods and services produced in a given year within the borders of the country. It is a measured monetary

Question 6

What is GNI?

Answer 6

Gross national income (GNI) is the total market value of all final goods and services produced in a given year by the residents or registered business from a particular country anywhere in the world. GNI includes imports and exports

Question 7

What is the difference between GDP and GNI?

Answer 7

GDP is location based only looks at those living within the country, GNI is ownership based and is the production owned by a country’s residents regardless of their location.

Question 8

What are taxes?

Answer 8

Taxes on production refers to tax on production not linked to specific goods or services. These are paid to the government and are a cost

Question 9

What are subsidiaries?

Answer 9

Subsidies are paid to businesses in order to subsidies the production of a particular commodity to allow manufacturers to sell at a lower price. Subsidiaries are paid by the government to absorb costs

Question 10

What should we avoid when measuring GDP?

Answer 10

• When measuring GDP we need to avoid double counting, by only looking at the final good and excluding intermediate goods, this is because the value of final goods already includes the value of all the intermediate goods that were used in producing them.
• GDP also excludes non-production transactions such as purely financial transactions and second hand sales. Purely financial transactions include public transfer payments, private transfer payments and stock market transactions

Question 11

What are Intermediate goods?

Answer 11

Intermediate goods are goods and services that are purchased for resale or for further processing or manual factoring.

Question 12

What are final goods?

Answer 12

Final goods are goods and services that are purchased for final use by consumers.

Question 13

What are the three approach’s to calculating GDP?

Answer 13

• Expenditure and value-added approach - concerns the sum of money spent to purchase the output. Is the final product or value added approach
• Income approach - concerns the income derived or created from production. It the the earnings or allocation approach
• The production approach - looks at how the production process works and the value added at each of the stages

Question 14

What is the expenditure approach calculation?

Answer 14

Expenditure approach calculation: GDP = C + I + G + Xn

Question 15

What is the C in the expenditure calculation?

Answer 15

The consumption by households are the personal consumption expenditures, C. Such as durable and non-durable consumer goods and services

Question 16

What is the I in the expenditure calculation?

Answer 16

The investments by businesses are gross private domestic investment, I. Which includes all expenditure by firms and includes only investments in the form of added capital, the mere transfer of claims to existing capital goods does not create new capital

Question 17

What is the G in the expenditure calculation?

Answer 17

The government purchases, G. These are government consumption expenditure and gross investment, goods and services and social capital.

Question 18

What is the Xn in the expenditure calculation?

Answer 18

The expenditure by foreigners, net exports, Xn This is the difference between exports (X) and imports (M). (Xn = X - M)

Question 19

What does Gross private domestic investment include?

Answer 19

• All final purchases of machinery, equipment and tools by business enterprise
• All construction
• Changes in inventories such as an increase in inventories and unconsumed output

Question 20

What are the four factors of production and their returns that the income approach looks at?

Answer 20

• The return for labour is wages, the compensation of employees. This is the largest share of national income, it includes salary supplements.
• The return for capital is interest and the return for land is rent. These are net operating surplus, these are payment for the resources
• The return on entrepreneurship is profit. It’s the net surplus. These are the proprietor’s income consists of the net income of sole proprietors, partnership and other unincorporated businesses and corporate profits.

Question 21

What are the three categories that the corporate income is divided into?

Answer 21

National income accountants subdivide corporate into three categories:
- Corporate income taxes
- Dividends
- Undistributed corporate profits- monies saved by corporations to be invested

Question 22

What is the similarities between the income and expenditure approach?

Answer 22

The income approach is calculated by adding the income earned by the different factors of production. The expenditure of the economy should equal the income earned in the economy

Question 23

What is the difference between the income and expenditure approach?

Answer 23

The expenditure approach is linked to the GDP at the market prices, while the income approach is associated with the GDP at factor costs

Question 24

How is the production approach calculated?

Answer 24

By calculating and summing the values added to all the goods and services produced by all firms in the economy we find the market value of the economy total output

Question 25

What should be avoided in the production approach?

Answer 25

In the production approach we could avoid multiple counting by measuring and culminating only the value added at each stage.

Question 26

What is value added?

Answer 26

The value added is the market value of a firms output less the value of the inputs the firm has brought from others.

Question 26

What is consumption of fixed capital?

Answer 26

The huge depreciation charge made against private and social capital each year is called consumption of fixed capital because of its allowance for capital that has been consumed in producing the year’s GDP.