Chapter 20

Question 1

What are the 3 methods for measuring national income (output)?

Answer 1

• total value added from domestic production
• total expenditures on domestic output
• total income generated by domestic production

Question 2

value added formula

Answer 2

value added= revenues - non-labour costs

or value added = payments to factors of production

Question 3

Summing value added avoids the problem of _________ when measuring total output

Answer 3

double counting

Question 4

total value added in the economy is called_______________

Answer 4

Gross Domestic Product (GDP)

Question 5

What are the four broad expenditure categories to calculate GDP from the expenditure side?

Answer 5

• consumption
• investment
• government purchases
• net exports

Question 6

what does actual consumption expenditure include?

Answer 6

expenditure on all

final goods during the year

Question 7

def. actual investment expenditure (Ia)

Answer 7

expenditure on the production	
of goods	not for present	consumption,	including:
• inventories
• plant and equipment
• residential housing

Question 8

net investment formula

Answer 8

net investment= gross investment - Depreciation

Question 9

what happens when net investment increases?

Answer 9

capital stock is growing

Question 10

def. actual government purchases

Answer 10

the purchase of currently produced goods and services by government
• excluding transfer payments.

**valued at cost rather than at market value

Question 11

def. actual net exports (NXa)

Answer 11

the difference between exports and imports: NXa = (Xa – Ima)

Exports are purchases of Canadian-produced goods and services by
foreigners. We subtract imports because they are not produced in
Canada

Question 12

GDP from the expenditure side formula

Answer 12

GDP = Ca + Ia + Ga + NXa

Question 13

GDP from the income side

Answer 13

sum of factor incomes and other claims on the value of output.

Question 14

What does factor income include?

Answer 14

• wages

- rent, interest, and profits

Question 15

what do non-factor payments include?

Answer 15

• indirect taxes (net of subsidies)

- depreciation of existing physical capital

Question 16

GDP from the income side formula

Answer 16

GDP = Net domestic income +	
Indirect taxes	(less subsidies) +	 Depreciation

Question 17

what is the difference between GDP and GNP (Gross National Product)

Answer 17

the difference between income produced and income received

Question 18

GDP is superior as a measure of ___________

Answer 18

domestic economic activity.

Question 19

GNP is superior as a measure of _______________

Answer 19

living standards of residents

Question 20

what is a more “refined” measure of living standards

Answer 20

disposable personal income:

GNP minus:

• any part not actually paid to households
• personal income taxes
• PLUS transfer payments received by households

Question 21

def. nominal GDP

Answer 21

GDP that is valued at current prices

Question 22

real GDP

Answer 22

GDP that is valued at constant base-period prices, it measures real national income

Question 23

how is the value of output in each period computed?

Answer 23

using a common set of base-period prices

Question 24

changes in nominal GDP reflect changes in ________

Answer 24

price and quantities

Question 25

changes in real GDP reflect changes in ________

Answer 25

quantities

Question 26

GDP Deflator

Answer 26

GDP deflator = (Nominal GDP/Real GDP) x 100

**implicitly defines a price index

*a comprehensive index of prices because it includes the prices of all goods and services produced in the country

Question 27

do CPI and the GDP deflator move together?

Answer 27

–Not necessarily.

Because CPI tracks consumer prices and GDP deflator tracks the prices of goods produced in Canada, there will be some differences

Question 28

Omissions from the GDP (5)

Answer 28

National	income accountants cannot measure economic activity that takes place	outside of regular, legal markets:
• illegal activities
• leisure
• the underground	economy
• home production
• economic "bads"

Question 29

Why is the current GDP approach useful?

Answer 29

1. It would be difficult to correct the major omissions.
2. The level of GDP may be inaccurate but the change in GDP is a good indication of the changes in economic activity.
3. To design policies to control inflation it is necessary to know the flow of money payments made to produce and purchase Canadian output.

Question 30

describe GDP and Living Standards

Answer 30

“Well-being” is a broader concept than material living standards:
• GDP is not a complete measure of economic well-being
• but income is a very important part of well-being and GDP is a good measure of income.