Chapter 23 : Measuring a Nation’s Income

Question 1

Total income

Answer 1

Wages, rent, and profit

Question 2

Total expenditure

Answer 2

Consumption, investment, government purchases, and net exports

Question 3

Gross domestic product (GDP)

Answer 3

Market value of all final goods and services produced
within a country in a given period of time
GDP = Y = C + I + G + NX

Question 4

Intermediate production

Answer 4

Goods that are produced by one firm to be further processed by another firm

Question 5

Final production

Answer 5

Finished products sold to the end user

Question 6

Gross national product (GNP)

Answer 6

Market value of all final goods and services produced by a nation’s residents in a given period of time
GNP = GDP + factor payment from abroad – factor payment to abroad
= GDP + net factor payment from abroad (NFA)

Question 7

Depreciation(De)

Answer 7

Value of worn-out equipment and structures

Question 8

(a) Consumption(C)

(b) Why does C exclude new housing ?

Answer 8

(a) Spending by households on goods and services, excluding new housing
(b) Because new housing can increase its value after time (different from others affected by depreciation)

Question 9

(a) Investment(I)

(b) What does i exclude ?

Answer 9

(a) Spending on capital equipment, inventories, and structures, including household purchases of new housing
(b) spending on stocks, bonds, and mutual funds.

Question 10

(a) Government purchases(G)
(b) Why does G exclude “transfer payment” ?
(EX: government payments for Social Security, welfare, and unemployment benefits)

Answer 10

(a) Spending on goods and services by all levels of government.
(b) Because government does not receive G and S in return.

Question 11

(a) Net exports(NX)

(b) Why must Imports be subtracted ?

Answer 11

NX = Exports - Imports
Because C, I, G include expenditures on all goods (foreign and domestic) => foreign component must be removed so that only spending on domestic production remains.

Question 12

Transfer payment

Answer 12

Expenditures by government for which they receive no goods or services

Question 13

Real GDP (GDPr)

Answer 13

Output valued at base-year prices

Question 14

Nominal GDP (GDPn)

Answer 14

Output valued at current prices

Question 15

Base year

Answer 15

The year from which prices are used to measure real GDP

Question 16

(a) GDP deflator

(b) Percentage change in GDP deflator is ____

Answer 16

(a) price index that measures price level in current year relative to base year
GDP deflator = (GDPn/GDPr) × 100
(b) a measure of inflation rate

Question 17

Recession

Answer 17

Period of decline in GDP

Question 18

Why must income be equal expenditure ?

Answer 18

Because in every transaction:

seller’s income = buyer’s expenditure

Question 19

GDP is a measure of (a)____ in the economy.
GDP can be measured by adding up (b)____ or (c)____ in the economy.
=> income = expenditure = GDP.

Answer 19

(a) total income or total output
(b) earned income (wages, rent, and profit)
(c) expenditure on produced G and S

Question 20

“Market value” means that ____

=> Items sold at higher prices are more heavily weighted in GDP.

Answer 20

production is valued at the price paid for the output.

Question 21

“Of all” means that ____

EX: GDP exclude illegal drugs and household self-production include estimated rental value.

Answer 21

GDP attempts to measure all production legally sold in markets.

Question 22

“Final” means that ____

EX: GDP include goods sold at retail, exclude intermediate goods.

Answer 22

GDP includes only G and S sold to end user

Question 23

“Goods and services” means that ____

Answer 23

GDP includes both TANGIBLE and INTANGIBLE items (EX: cars and trucks ; lawyers’ and doctors’ services).

Question 24

“Produced” means that ____

Answer 24

we excludes the sale of used items that were produced (and counted) in a previous period.

Question 25

“Within a country” means that ____

Answer 25

GDP measures the value of production within the

geographic borders of a country.

Question 26

“In a given period of time” means that ____

Answer 26

we measure GDP per year or per quarter.

Question 27

Why the difference between measuring GDP by expenditure and measuring GDP by income is statistical discrepancy ?

Answer 27

Because GDP data are statistically “seasonally adjusted” to eliminate the systematic variations in seasonal events like Christmas and crop harvest
=> different in expenditure statistic

Question 28

Net national product (NNP)

Answer 28

NNP = GNP - Depreciation(De).

Question 29

National income (NI)

Answer 29

the total income earned by nation’s residents.

NI = Y = NNP - Indirect taxes(Ti) + Subsidies.

Question 30

Personal income (PI)

Answer 30

the income that households and noncorporate businesses receive.
PI = NI - Profit(Pr) - social insurance + dividends +
government transfer to individual + interest income
from holding government debt

Question 31

Disposable personal income (Yd)

Answer 31

income received after paying taxes
Yd = PI - net personal taxes(T)
= Consumption(C) + Saving(S)

Question 32

(a) ____ is better measure of production in the economy.

(b) Is GDP a Perfect measure of economic Well-Being?

Answer 32

(a) GDPr
(b) NO, because:
- GDP excludes leisure, quality of environment,
G and S produced at home and not sold in markets.
- GDP says nothing about “Distribution” of income
- GDP fails to capture underground/shadow economy