NATIONAL INCOME ACCOUNTING

Question 1

What is the definition of Gross Domestic Product (GDP)?

Answer 1

The summation of all the values of goods and services produced in a country by nationals and non-nationals. It is the market value of all final goods and services produced within a country during a given period.

Question 2

What are the three basic approaches to measuring GDP?

Answer 2

The value-added approach, the income approach, and the expenditure approach.

Question 3

Explain the value-added approach to calculating GDP.

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Answer 3

It involves summing up the net values of output (value-added) at every stage of production in the economy during a year. The value added by a firm equals the market value of its product minus the cost of inputs purchased from other firms

Question 4

What is the formula for calculating GDP using the expenditure approach?

Answer 4

: Y = C + I + G + (X – M), where Y = National Income, C = Aggregate consumption expenditure, I = Private investment expenditure, G = Government expenditure, X = Exports expenditure, and M = Imports expenditure.

Question 5

What is the definition of Gross National Product (GNP)?

Answer 5

The market value of all goods and services produced by all the nationals (citizens) of a given country, irrespective of whether they reside within the domestic country or abroad.

Question 6

How is Net National Product (NNP) calculated?

Answer 6

NNP = GNP – Depreciation

Question 7

Define “National Income at factor cost”.

Answer 7

It is the sum of the monetary value of all goods and services produced by the factors of production or the income accruing to the various factors of production in one year in a country.

Question 8

What is the difference between nominal and real GDP?

Answer 8

Nominal GDP is measured in current market prices, while real GDP is adjusted for inflation, using the prices of a base year.

Question 9

Give four reasons why national income accounting is important.

Answer 9

It records transactions in the economy
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▪
It provides a basis for national economic policies
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It reveals relationships between aggregate transactions
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▪
It is useful in the study of business fluctuations and economic policies

Question 10

What are some of the problems encountered in the computation of national income?

Answer 10

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Problem of double counting
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Difficulty of defining “nation”
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Problem of measuring non-market or domestic activities
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Income earned through illegal activities
.

Question 11

What are some items not included in the calculation of GDP?

Answer 11

Goods and services that have no market value ie goods provided by the govt
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Intermediate goods and services
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Sale and purchase of old goods
▪
Transfer payments
▪
Income earned through illegal activities
The profits earned or losses incurred on account of changes in capital assets as a result of the fluctuations in market prices are not included

Question 12

intermediate goods are not counted in GDP to avoid ————

Answer 12

double counting

Question 13

Define intermediate goods and final goods, and explain why this distinction is important in national income accounting.

Answer 13

Intermediate goods are used in the production process of other goods
Final goods are the end product of the production process that consumers actually use
.

Question 14

A tire manufacturer sells tires to both consumers and car manufacturers. When calculating GDP, how are these sales treated differently?

Answer 14

Tires sold to car manufacturers are considered intermediate goods and are not directly counted in GDP
Tires sold to consumers as replacements are considered final goods and are included in GDP
.

Question 15

Explain how the value-added approach addresses the issue of intermediate goods.

Answer 15

The value-added approach calculates the net value of output at each stage of production. This means that only the additional value created by each firm is counted, avoiding the inclusion of the cost of intermediate goods purchased from other firms.

Question 16

A wheat farmer sells wheat to a miller for $50. The miller processes the wheat into flour and sells it to a baker for $80. The baker uses the flour to make bread and sells it to consumers for $150. Calculate the total contribution to GDP using the value-added approach.

Answer 16

Farmer’s value added: $50 - $0 = $50.
Miller’s value added: $80 - $50 = $30.
Baker’s value added: $150 - $80 = $70.
Total value added (GDP contribution): $50 + $30 + $70 = $150.

Question 17

Provide examples of goods that can be either intermediate or final goods depending on their use.

Answer 17

Steel can be an intermediate good when used to manufacture cars, or a final good when sold directly to consumers for construction purposes.
Flour can be an intermediate good when used by a bakery, or a final good when sold directly to consumers for home baking.

Question 18

A furniture company produces tables. It buys wood for $30, glue for $5, and varnish for $10. It sells the finished tables for $100 each. What is the value added by the furniture company per table?

Answer 18

Value added = Market value of product - Cost of inputs
Value added = $100 - ($30 + $5 + $10) = $100 - $45 = $55.

Question 19

Explain how capital goods are treated in GDP calculations, and why.

Answer 19

Newly produced capital goods (e.g., factories, equipment, machines) are classified as final goods to avoid double counting. This is because they are not used up during the production process in the same way as intermediate goods.

Question 20

A company invests $1,000,000 in new machinery. Is this included in GDP? If so, how?

Answer 20

Yes, the $1,000,000 investment in new machinery is included in GDP as part of private investment expenditure (I) in the expenditure approach.

Question 21

Why are used goods excluded from GDP calculations?

Answer 21

Used goods are excluded because their value was already included in GDP in the year they were originally produced. Including them again would result in double counting.

Question 22

Mr. Olusanya Samuel buys a 10-year-old house for N5 million, and Mr. Abdulrahoof Bello, the real estate agent, receives a 1% commission (N50,000). How much does this transaction contribute to the current year’s GDP?

Answer 22

Only the real estate agent’s commission (N50,000) is included in the current year’s GDP because it represents a new service provided in the current year. The value of the house itself is not included because it was already counted in GDP when the house was built.

Question 23

Another name for GDP is

Answer 23

National Income

Question 24

Not all goods and services that have a market value are counted in GDP.True or False

Answer 24

TRUE

Question 25

A special type of good that is difficult to class as intermediate or final is a -------------

Answer 25

capital good.

Question 26

A farmer produces N1, 000 worth of cattle milk. He sold N300 worth of milk to his friends and uses the rest of the milk to feed his livestock, which he at the end sold to his friends for N1, 500. What is the farmer’s contribution to GDP?

Answer 26

The milk the farmer produced serves as an intermediate good and part as a final good. The N700 (N1, 000 minus N300) worth of cattle milk that was fed to the livestock is an intermediate good, thus, it is not counted as part of GDP. Whereas, the N300 worth of cattle milk sold to his friend is a final good. So, it is counted. Thus, final goods in the examples above are the N300 worth of cattle milk and the N1, 500 worth of livestock that the farmer sold to his friend. Adding N300 to N1, 500 makes N1, 800 which is the farmer’s contribution to GDP.

Question 27

The word ‘domestic’ used in the definition of gross domestic product tell us that GDP is a measure of ------- activities within a given country

Answer 27

economic

Question 28

Suppose a 10 year old house is sold to Mr. Olusanya Samuel for N5 million and Mr. abdulrahoof bello pays the real estate agent in charge of the sales a commission of one per cent which is N50,000 (1/100 x N5 million

Answer 28

The contribution of this economic activity to GDP is only N50, 000. the N50, 000 will be included in GDP because the N50, 000 fee paid to the real estate agent represents the market value of the agent’s services in helping Mr. Olusanya Samuel to find and purchase the house

Question 29

Assume a country produces only bananas and oranges. In 2020, they produced 500 bananas at N2 each and 300 oranges at N3 each. In 2021, they produced 600 bananas at N2.50 each and 400 oranges at N3.50 each. Calculate the Nominal GDP for both years AND THE REAL GDP

Answer 29

Nominal GDP 2020: (500 bananas x N2) + (300 oranges x N3) = N1,000 + N900 = N1,900 Nominal GDP 2021: (600 bananas x N2.50) + (400 oranges x N3.50) = N1,500 + N1,400 = N2,900 Real GDP 2021: (600 bananas x N2) + (400 oranges x N3) = N1,200 + N1,200 = N2,400

Question 30

In 2015, a country produced 100 units of good A at N10 and 50 units of good B at N20. In 2016, they produced 120 units of good A at N12 and 60 units of good B at N22. Calculate Nominal GDP for both years AND THE REAL GDP

Answer 30

Nominal GDP 2015: (100 units of good A x N10) + (50 units of good B x N20) = N1,000 + N1,000 = N2,000 * Nominal GDP 2016: (120 units of good A x N12) + (60 units of good B x N22) = N1,440 + N1,320 = N2,760 Real GDP 2016: (120 units of good A x N10) + (60 units of good B x N20) = N1,200 + N1,200 = N2,400

Question 31

Differentiate between Gross Domestic Product (GDP) and Gross National Income(GNP)

Answer 31

◦ GDP measures economic activity within a country whereas GNP therefore takes account of three components which are the 1. income or output of citizens of a country residing in the country (GDP), 2. the income or output of citizens residing abroad (factor income from the rest of the world) and 3. excludes the income or output of foreigners residing in the domestic country (factor income to the rest of the world)

Question 32

3. List and Explain the importance of National Income Accounting

Answer 32

1. Records the transactions that take place in the economy as a whole 2.Provides a basis for national economic policies 3.Reveals the significant relationships between aggregates of transactions, 4.Is useful in the study of business fluctuations and economic policies 5 Helps in understanding the complex system in the economy, 6.Provides insight into how and why an economy functions the way it does, 7.Serves as a valuable instrument for policymakers 8.Enables comparisons of changes in the components of the economy 9.Is used to forecast future events

Question 33

Discuss the Problems of National income measurements

Answer 33

1.The problem of double counting 2.There is a difficulty of defining "nation" because the income earned by a country's nationals in a foreign country is included in national income. 3. The problem of measuring non-market or domestic activities 4.Measuring national income in monetary terms can lead to an underestimation of real national income because it does not include the leisure given up when producing a commodity 5.Some public services cannot be correctly estimated, for example, police and military services

Question 34

---------- income is defined as the ratio of a country’s income to its population

Answer 34

Per capital

Question 35

GDP per capita is defined as the ratio of a country’s GDP to the --------- of the country

Answer 35

population

Question 36

Disposable income or personal disposable income is the actual income which an individual spent on --------------

Question 37

Definition of Consumption

Answer 37

The use of goods and services by households. It is also the aggregate of all economic activity that does not entail the design, production, and marketing of goods and services.

Question 38

: What is consumption expenditure?

Answer 38

The purchase of goods and services for use by households.

Question 39

---------consumption represents consumption when income is zero

Answer 39

Autonomous

Question 40

What factors determine consumption?

Answer 40

Government fiscal policy, expected future income, credit facilities, inherited wealth, population distribution with respect to age, and societal attitudes towards current

Question 41

What is savings?

Answer 41

Income not spent on goods and services for current consumption.

Question 42

-------------- refers to the percentage of income that is spent on goods and services rather than on savings

Answer 42

The average propensity to consume (APC)

Question 43

What is Average Propensity to Save (APS)?

Answer 43

The proportion of income that is saved rather than spent on goods and services.

Question 44

What is savings?

Answer 44

Income not spent on goods and services for current consumption.

Question 45

What is the savings function formula?

Answer 45

S = -b0 + BY, where S is savings, -b0 is autonomous savings, and B is the marginal propensity to save

Question 46

What are the determinants of savings?

Answer 46

Income level, interest rate, government fiscal policy, habits and environmental factors

Question 47

What is investment?

Answer 47

The act of producing capital goods which are not for immediate consumption.

Question 48

What are the components of investment?

Answer 48

Autonomous investment, induced investment, and net investment.

Question 49

What are the determinants of investment?

Answer 49

1. Level of national income 2.Cost of funds (lending rate or interest rate) 3.Government fiscal policies in respect of minimum wages and salaries, and taxes 4.Technical progress (technological changes) 5. Business climate

Question 50

What is economic welfare?

Answer 50

Economic welfare is the part of social welfare that can be directly or indirectly measured in money

Question 51

According to Pigou, how can non-economic welfare be improved?

Answer 51

By the income-earning method and the income-spending method.

Question 52

According to Pigou, does an increase in economic welfare always result in an increase in total welfare?

Answer 52

Not necessarily, because the causes that lead to an increase in economic welfare may also reduce non-economic welfare.

Question 53

What are two ways to study the effect of national income on economic welfare?

Answer 53

By change in the size of national income and by change in the distribution of national income

Question 54

If the change in national income is due to a change in prices, would it be easy to measure the real change in economic welfare?

Answer 54

No, it would be difficult to measure the real change in economic welfare

Question 55

Can national income be a reliable index of economic welfare if per capita income is not borne in mind?

Answer 55

No, it cannot be a reliable index of economic welfare.

Question 56

Even with the increase in national income and per capita income, can economic welfare decrease?

Answer 56

Yes, this is the case when the income of the richer sections of society increases and the poor do not gain at all from it.

Question 57

How can the redistribution of wealth increase economic welfare?

Answer 57

By reducing the wealth of the rich and increasing the income of the poor.

Question 58

What are the measures on reducing the wealth of the rich to increase economic welfare

Answer 58

1. By progressive taxation on income, property etc. 2. By imposing checks on monopoly 3 By nationalizing social services 4. By levying duties on costly and foreign goods which are used by the rich

Question 59

What are some ways to raise the income of the poor?

Answer 59

Fixing a minimum wage rate, increasing the production of goods used by the poor and fixing their prices, granting financial assistance to the producers of these goods, distributing goods through co-operative stores, and providing free education, social security, and low rent accommodation.

Question 60

According to Pigou, what is required to increase economic welfare with regards to national income?

Answer 60

Any cause which increases the absolute share of real income in the hands of the poor, provided that it does not lead to a contraction in the size of the national dividend from any point of view will, in general, increase economic welfare.

Question 61

Is national income a satisfactory measure of economic welfare?

Answer 61

National income can be used to measure economic welfare. However, GNP is not a satisfactory measure of economic welfare because the estimate of national income does not include certain services and production activities