Module 1 (Introduction + Macroeconomic Accounting)

Question 1

Gross Domestic Product (GDP)

Answer 1

A measure of all currently produced final goods and services evaluated at market prices.

GDP is essentially a measure of output in an economy.

Question 2

Why are intermediate goods not considered in GDP calculations?

Answer 2

Accounting for intermediate goods results in the “double-counting” of output/value since the prices of intermediate goods are included in the final prices of goods/services.

Accounting for intermediate goods would artificially inflate the GDP, so only final goods and services are included in GDP calculations.

Question 3

Types of Production-Goods Included in GDP Calculations

Answer 3

• Capital Goods
• Inventory Investment

Question 4

Capital Goods

Answer 4

Equipment/technology used during the production process of a good that are not completely consumed in the production.

• The amount of a capitol good consumed/used during the prodution process is included in the price of the final good.
• The amount of a capitol good not consumed/used during production is included in investment.

Question 5

Inventory Investment

Answer 5

The net change in inventories of final goods awaiting sale and/or intermediate goods not yet used.

Question 6

GDP vs. GNP

Answer 6

• GDP: A measure of the value of final goods/servies produced within a nation’s geographic boundaries (regardless of the citizenship of who owns/produces the good/service).
• GNP:A measure of the output owned/produced by a nation’s citizens (regardless of the location the output is produced).

Question 7

Gross National Product (GNP)

Answer 7

A measure of the output owned/produced by a nation’s citizens (regardless of where the output is produced).

Whereas GDP includes the within-country earnings of foreign workers/firms, GNP includes the out-of-country earnings of overseas citizens/firms.

Question 8

What types of activies are not inluded in GDP calculations?

Answer 8

• Nonmarket Activities
• Underground/Illegal Activities

Question 9

Expenditure Components of GDP

Answer 9

• Consumption (C)
• Investment (I)
• Government Spending (G)
• Net Exports (NX)

Question 10

GDP: Output Equation

Expenditure Method

Answer 10

Y = C + I + G + NX

Question 11

Consumption

GDP Measurements

Answer 11

The value of household purchases of final goods/services.

Question 12

Consumption: Components

GDP Measurements

Answer 12

• Consumer Durable Goods
• Consumer Non-Durable Goods
• Consumer Services

Question 13

Invesment: Components

GDP Measurements

Answer 13

• Fixed Investment
• Resdential Construction Investment
• Inventory Investment

Question 14

Government Spending

MIC Calculations

Answer 14

The value of final goods/services that are bought by the government.

Government spending does not include transfer payments or income redistribution.

Question 15

Net Exports

Answer 15

The difference in value between the gross imports and the gross exports of a country.

• Net Exports (NX) = Exports (X) – Imports (Z)
• Net exports represents the contribution of the foreign sector to the GDP.

Question 16

Why are intermediate goods accounted for when calculating inventory investment?

Answer 16

Intermediate goods included under inventory investment are goods that are “currently produced” but have yet to become final goods.

Since inventory investment intermediate goods are not included in the price of any final good, not accounting for their value/output would underestimate GDP.

Question 17

Depreciation

Answer 17

The amount of a capitol good that is used/consumed in the production process of a good.

Question 18

Why are GDP calculations highly error-prone?

Answer 18

• There is dificulty in determining whether a good/service should be included in GDP calculations.
• There is difficulty in measuring the immense volume of transactions taking place for/within a country.

Question 19

National Income (NI)

Answer 19

The sum of all factor earnings from the current prodution of goods/services.

(The sum of wages given to laborers, rents paid to capital-owners, and rents paid to landowners.)

• Factors of Production: Land, Labor, Capital
• NI = NNP – Indirect Taxes

Question 20

Net National Product (NNP)

Answer 20

The amount a country has produced/remaining relative to their status during the previous period.

• NNP represents a country’s gain/loss in produced-quantity over a given time period.
• NNP = GNP – Depreciation

Question 21

Types of Indirect Taxes

Answer 21

• Value-Added Taxes
• Sales Taxes
• Excise Taxes

Question 22

Value-Added Tax

Service Tax

Answer 22

A consumption tax on goods/services that is leveled at each stage of production, distribution, or sale.

Question 23

Excise Tax

Answer 23

A consumption tax imposed on certain manufactured goods.

Question 24

Why are indirect taxes omitted from National Income calculations?

Answer 24

Indirect taxes create a discrepancy between the price of a good/service on the market and the actual amount paid to factors of production.

Since the government collects indirect taxes, the consumer will be paying more for a good/service than what the factors recieve for producing that good/service.

Question 25

Components of National Income

Answer 25

• Conpensation of Employees
• Corporate Profits
• Proprietor’s Income
• Rental Income
• Net Interest

Question 26

Personal Income (PI)

Answer 26

The total amount/value individual people earn in a given year from income-earning activities (including labor).

Question 27

Personal Disposable Income (PDI)

Answer 27

The amount/value individual people have available to spend in a given year.

PDI = PI – Personal Taxes

Question 28

Two Sides: National Income Accounts

Answer 28

• Product Side: Production + Sales
• Income Side: Distribution of Sales Proceeds