CHAPTER 27
Measuring Domestic Output and National Income
A. Short-Answer, Essays, and Problems
1. Of what use is national income accounting to economists and to policy makers?
3. How would the value of output produced at an American-owned factory in the United States and a foreign-
owned factory in the United States be treated in GDP accounting?
4. Why is GDP a monetary measure?
6. Why do economists worry about “multiple counting” and calculate only the “value added” in the
production process?
7. What is the value added by all the firms A–E from the production of a product as described below? What
did each firm add separately in value and what does it total?
Stage of production
Sales value of product
Firm A
$1610
Firm B
2500
Firm C
3700
Firm D
5200
Firm E
7600
8. What is the value added by all the firms A–E from the production of a product as described below? What
did each firm add separately in value and what does it total?
Stage of production
Sales value of product
Firm A
$ 4,500
Firm B
8,600
Firm C
14,700
Firm D
20,100
Firm E
32,300
9. Identify the two major types of nonproduction transactions that are not included in GDP.
11. Why is the value of the sales of stocks and bonds excluded from GDP?
12. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in
each instance.
13. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in
each instance.
14. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in
each instance.
15. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in
each instance.
16. Explain the two different ways of looking at GDP.
19. For each of the items below determine the type of personal consumption expenditure: durable good,
nondurable good, or service.
22. Net investment can be positive, negative, or zero, but gross investment can never be less than zero.
23. (Consider This) Explain how a reservoir can serve as an analogy for thinking about a nation’s capital stock,
27. What are the components of national income? What is the relative share going to wages and salaries and to
corporate profits?
28. What adjustments need to be made to go from national income to GDP?
29. How does NDP differ from GDP?
30. In the real world the expenditure approach to calculating GDP does not always equal the income approach.
31. Why is it important to account for the net foreign factor income when calculating domestic income instead
of national income?
32. How does the personal income measure differ from the disposable income measure?
33. How do you calculate personal income from national income?
34. How do you calculate disposable income from personal income?
35. State an equation for the two main uses of disposable income.
36. The following is a list of figures for a given year in billions of dollars. Using this data, compute: (a) GDP;
(b) NDP; (c) NI; (d) PI; (e) DI; (f) Net exports.
Billions
of dollars
Transfer payments
$ 16
Government purchases
80
Personal taxes
38
Corporate income taxes
28
Taxes on production and imports
15
Social Security contributions
8
Undistributed corporate profits
19
Proprietors’ income
25
Compensation of employees
258
Personal consumption expenditures
322
Consumption of fixed capital
4
Rents
10
U.S. Exports
14
Corporate profits
70
Interest
12
Dividends
23
Imports to U.S.
17
Gross private domestic investment
63
Net foreign factor income
10
Statistical discrepancy
35
37. What is the GDP index?
38. Differentiate between nominal and real GDP.
39. How is a price index computed?
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40. The next four questions refer to the following price and output data over a five-year period for an economy
that produces only one good. Assume that year 2 is the base year.
Year
Price
per unit
1
$2
2
3
3
4
4
5
5
6
41. The following table shows the price of a specific stereo receiver for a five-year period. Using year 3 as the
base year, calculate the price index for each year.
Year
Price
Price index
1
$ 88
_____
2
$100
_____
3
$120
_____
4
$132
_____
5
$140
_____
42. What are the two basic ways of deriving real GDP from nominal GDP?
43. In 1997, GDP in the tiny country of Lindora was $4 million and the price of a market basket of goods was
$15. In 2011, GDP in Lindora was $5 million and the price of a market basket of goods was $35. Given
44. In 2000, GDP in the country of Alpha was $15 million and the price of a market basket was $20. In 2011,
GDP in Alpha was $18 million and the market basket of the goods was $25. Given this information, it is
45. The following table shows the price of a specific stereo receiver for a five-year period. Using Year 1 as the
base year, calculate the price index for each year.
Year
Price
Price index
(answers using
Year 1 = 100)
1
$112
_____
2
144
_____
3
161
_____
4
176
_____
5
200
_____
46. What is the relationship between real GDP, nominal GDP, and the price index?
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47. The following data show nominal GDP and the appropriate price index for several years. Compute real
GDP for each year and indicate whether you have “inflated” or “deflated” nominal GDP in finding real
GDP. All GDP are in billions.
Year
Nominal
GDP
Price level
index
Real GDP
Inflated (I)
Deflated (D)
1
$117
120
_____
_____
2
124
104
_____
_____
3
143
85
_____
_____
4
149
96
_____
_____
5
178
112
_____
_____
6
220
143
_____
_____
48. How have the values of nominal GDP, real GDP and GDP price index changed in the United States since
the year 2005?
49. Discuss the merits and demerits of GDP as a measure of the economy’s output performance and as a
50. A witness told a congressional committee that if the United States doubled its real GDP, it would be a
52. Why is GDP overstated in terms of the environment?
53. What is meant by intermediate output? How is this output incorporated into GDP?
54. Compare and contrast Gross Output (GO) and Gross Domestic Product.
55. Suppose an economy measures the following levels of production in 2016:
Output Type
Level of Output
Resource Extraction
$10 billion
Production
$12 billion
Distribution
$5 billion
Final Output
$25 billion
Calculate Gross Output (GO) and Gross Domestic Product (GDP) for 2016. Which is larger? Will this
always be the case?
56.(Last Word) Where do government economists get the data for the national income accounts?
B. Answers to Short-Answer, Essays, and Problems
1. Of what use is national income accounting to economists and to policy makers?
2. Define GDP and its characteristics.
3. How would the value of output produced at an American-owned factory in the United States and a foreign-
owned factory in the United States be treated in GDP accounting?
4. Why is GDP a monetary measure?
5. Explain the difference between final and intermediate goods, and give an example of each.
6. Why do economists worry about “multiple counting” and calculate only the “value added” in the
production process?
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of McGraw-Hill Education.
firms. Summing the value of the contribution made by each firm at each stage of the production process
enables economists to determine GDP.
7. What is the value added by all the firms A–E from the production of a product as described below? What
did each firm add separately in value and what does it total?
Stage of production
Sales value of product
Firm A
$1610
Firm B
2500
Firm C
3700
Firm D
5200
Firm E
7600
8. What is the value added by all the firms A–E from the production of a product as described below? What
did each firm add separately in value and what does it total?
Stage of production
Sales value of product
Firm A
$ 4,500
Firm B
8,600
Firm C
14,700
Firm D
20,100
Firm E
32,300
9. Identify the two major types of nonproduction transactions that are not included in GDP.
(1) Purely financial transactions such as the purchase and sale of stocks and bonds are excluded, and also
10. Are Social Security payments included in GDP? Explain why or why not.
11. Why is the value of the sales of stocks and bonds excluded from GDP?
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12. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in
each instance.
(a) A monthly scholarship check received by an economics student
(b) The purchase of a new truck by a trucking company
(c) Government purchase of missiles from a private business
(d) The purchase of a used tractor by a farmer
(e) The value of the purchase of shares of Microsoft by an individual
13. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in
each instance.
(a) Social Security checks received by a retired person
(b) An increase in business inventories
(c) The income of a tax accountant working for a business
(d) Income received from interest on a corporate bond
(e) The cashing in of a U.S. savings bond
14. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in
each instance.
(a) A homeowner who mows her own lawn
(b) A decline in the average hours worked per week
(c) Business expenditures on pollution control equipment
(d) Income from illegal drug activities
(e) The person who purchases a health care product
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15. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in
each instance.
(a) An auto mechanic who fixes his own car at home
(b) Cash received from selling a corporate bond
(c) Spending by a city government on a waste treatment plant
(d) The pleasure that people obtain from working at jobs they like
(e) A veteran’s payment made to a retired military officer
16. Explain the two different ways of looking at GDP.
17. Define the four categories of expenditures which comprise GDP.
18. Describe the three basic types of personal consumption expenditures.
19. For each of the items below determine the type of personal consumption expenditure: durable good,
nondurable good, or service.
(a) car
(b) jewelry
(c) food at a grocery
(d) food at a restaurant
(e) shoes
20. Is the United States a service economy? Explain based on the types of personal consumption expenditures.
21. Give the three categories which comprise gross investment and explain the differences among them.
22. Net investment can be positive, negative, or zero, but gross investment can never be less than zero.
Explain.
23. (Consider This) Explain how a reservoir can serve as an analogy for thinking about a nation’s capital
stock, investment, and depreciation.
24. Explain what is and what is not included in government purchases in GDP.
25. Define net exports.
The value of net exports equals the value of exports minus the value of imports of goods and services. If
26. What is national income? List its components.
27. What are the components of national income? What is the relative share going to wages and salaries and to
corporate profits?
28. What adjustments need to be made to go from national income to GDP?
29. How does NDP differ from GDP?
30. In the real world the expenditure approach to calculating GDP does not always equal the income approach.
Explain why.
31. Why is it important to account for the net foreign factor income when calculating domestic income instead
of national income?
32. How does the personal income measure differ from the disposable income measure?
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33.How do you calculate personal income from national income?
34. How do you calculate disposable income from personal income?
35. State an equation for the two main uses of disposable income.
36. The following is a list of figures for a given year in billions of dollars. Using this data, compute: (a) GDP;
(b) NDP; (c) NI; (d) PI; (e) DI; (f) Net exports.
Billions
of dollars
Transfer payments
$ 16
Government purchases
80
Personal taxes
38
Corporate income taxes
28
Taxes on production and imports
15
Social Security contributions
8
Undistributed corporate profits
19
Proprietors’ income
25
Compensation of employees
258
Personal consumption expenditures
322
Consumption of fixed capital
4
Rents
10
U.S. Exports
14
Corporate profits
70
Interest
12
Dividends
23
Imports to U.S.
17
Gross private domestic investment
63
Net foreign factor income
10
Statistical discrepancy
35
(a) GDP $462; (b) NDP $458; (c) NI $433; (d) PI $379; (e) DI $341; (f) Net exports −$3.
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37. What is the GDP price index?
38. Differentiate between nominal and real GDP.
39. How is a price index computed?
40. The next four questions refer to the following price and output data over a five-year period for an economy
that produces only one good. Assume that year 2 is the base year.
Year
Price
per unit
1
$2
2
3
3
4
4
5
5
6
(a) If year 2 is the base year, give the price index for year 3.
(b) Give the nominal GDP for year 4.
(c) What is the real GDP for year 4?
(d) Tell which years you would deflate nominal GDP and which years you would inflate nominal GDP in
finding real GDP.
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41. The following table shows the price of a specific stereo receiver for a five-year period. Using year 3 as the
base year, calculate the price index for each year.
Year
Price
Price index
1
$ 88
_____
2
$100
_____
3
$120
_____
4
$132
_____
5
$140
_____
Year
Price
Price index
1
$ 88
73
2
$100
83
3
$120
100
4
$132
110
5
$140
117
To get the price index numbers, one would divide the given year’s price by the year 3 price and multiply
the result by 100 to express as a percentage in index form. So the year 5 index is $140 divided by $120 or
1.17. Multiply 1.17 100 to get 117 expressed in percentage.
42. What are the two basic ways of deriving real GDP from nominal GDP?
43. In 1990, GDP in the tiny country of Lindora was $4 million and the price of a market basket of goods was
$15. In 2016, GDP in Lindora was $5 million and the price of a market basket of goods was $35. Given
this information, it is clear that Lindora GDP had a higher level of production in 2016 than 1990. Evaluate
this statement.
44. In 2010, GDP in the country of Alpha was $15 million and the price of a market basket was $20. In 2016,
GDP in Alpha was $18 million and the market basket of the goods was $25. Given this information, it is
clear that Alpha GDP had a higher level of production in 2016 than 2010.
45. The following table shows the price of a specific stereo receiver for a five-year period. Using Year 1 as the
base year, calculate the price index for each year.
Year
Price
Price index
(answers using
Year 1 = 100)
1
$112
_____
2
144
_____
3
161
_____
4
176
_____
5
200
_____
Year
Price
Price index
(answers using
Year 1 = 100)
1
$112
70
2
144
90
3
161
100
4
176
110
5
200
125
46. What is the relationship between real GDP, nominal GDP, and the price index?
47. The following data show nominal GDP and the appropriate price index for several years. Compute real
GDP for each year and indicate whether you have “inflated” or “deflated” nominal GDP in finding real
GDP. All GDP are in billions.
Year
Nominal
GDP
Price level
index
Real GDP
Inflated (I)
Deflated (D)
1
$117
120
_____
_____
2
124
104
_____
_____
3
143
85
_____
_____
4
149
96
_____
_____
5
178
112
_____
_____
6
220
143
_____
_____
Year
Nominal
GDP
Price level
index
Real GDP
Inflated (I)
Deflated (D)
1
$117
120
$ 98
D
2
124
104
119
D
3
143
85
168
I
4
149
96
155
I
5
178
112
160
D
6
220
143
154
D
To get the answers for real GDP change the price index to percent (divide each index by 100), then divide
nominal GDP by the percent price index. For example, in year #1, divide $117 by 1.20 to get $98 in real
GDP. If the real GDP is less than the nominal it has been deflated; if the real GDP is more than the
nominal GDP it has been inflated.
48. How have the values of nominal GDP, real GDP and GDP price index changed in the United States since
the year 2015?
49. Discuss the merits and demerits of GDP as a measure of the economy’s output performance and as a
measure of its standard of living.
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50. A witness told a congressional committee that if the United States doubled its real GDP, it would be a
much less livable society than it is today. Explain this view.
51. The expanding “underground” economy creates problems for economic policy makers. Explain.
52. Why is GDP overstated in terms of the environment?
53. What is meant by intermediate output? How is this output incorporated into GDP?
54. Compare and contrast Gross Output (GO) and Gross Domestic Product.
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`55. Suppose an economy measures the following levels of production in 2016:
Output Type
Level of Output
Resource Extraction
$10 billion
Production
$12 billion
Distribution
$5 billion
Final Output
$25 billion
Calculate Gross Output (GO) and Gross Domestic Product (GDP) for 2016. Which is larger? Will this
always be the case?
56. (Last Word) Where do government economists get the data for the national income accounts?
The Bureau of Economic Analysis (BEA) of the Department of Commerce is responsible for compiling the
national income accounts. It gets consumption data from several Census Bureau surveys such as the Retail