978-0077660772 Chapter 7 Solution Manual Part 1

Chapter 07 – Measuring Domestic Output and National Income

McConnell, Brue, and Flynn 20e

DISCUSSION QUESTIONS

1. In what ways are national income statistics useful? LO1

Answer: National income accounting does for the economy as a whole what

The national income accounting system measures the level of production in the

economy at some particular time and helps explain that level. By comparing

2. Why do national income accountants compare the market value of the total outputs in various

years rather than actual physical volumes of production? What problem is posed by any

comparison over time of the market values of various total outputs? How is this problem

resolved? LO1

Answer: If it is impossible to summarize oranges and apples as one statistic, as

the saying goes, it is surely even more impossible to add oranges and, say,

Since oranges and computers have different values, the quantities of each

commodity are multiplied by their values or prices. Adding together all the

results of the price times quantity figures leads to the aggregate figure showing

Comparing market values over time has the disadvantage that prices change. If

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Chapter 07 – Measuring Domestic Output and National Income

To resolve this problem, statisticians deflate (in the case of inflation) or inflate (in

the case of deflation) the value figures for the total output so that only “real”

changes in production are recorded. To do this, each item is assigned a “weight”

3. Which of the following goods are usually intermediate goods and which are usually final

goods: running shoes; cotton fibers; watches; textbooks; coal; sunscreen lotion; lumber? LO1

Answer: Running shoes are usually a final good. The person purchasing the running

shoes is typically the individual who will use the shoes.

Watches are usually a final good. The person purchasing the watch is typically the

Textbooks are usually a final good. The person purchasing the textbook is typically the

4. Why do economists include only final goods and services in measuring GDP for a particular

year? Why don’t they include the value of the stocks and bonds bought and sold? Why don’t they

include the value of the used furniture bought and sold? LO1

Answer: The dollar value of final goods includes the dollar value of intermediate

This value is not included in GDP because such sales and purchases simply

Used furniture was produced in some previous year; it was counted as GDP then.

5. Explain why an economy’s output, in essence, is also its income. LO1

Answer: Everything that is produced is sold, even if the “selling,” in the case of

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Chapter 07 – Measuring Domestic Output and National Income

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Chapter 07 – Measuring Domestic Output and National Income

6. Provide three examples of each: consumer durable goods, consumer nondurable goods, and

services. LO2

Answer: Durable goods are products that have expected lives of three years or more.

Examples are refrigerators, new cars, etc…

7. Why are changes in inventories included as part of investment spending? Suppose inventories

declined by $1 billion during 2014. How would this affect the size of gross private domestic

investment and gross domestic product in 2014? Explain. LO2

Answer: Anything produced by business that has not been sold during the

accounting period is something in which business has invested—even if the

If inventories declined by $1 billion in 2014, $1 billion would be subtracted from

both gross private domestic investment and gross domestic product. A decline in

8. What is the difference between gross private domestic investment and net private domestic

investment? If you were to determine net domestic product (NDP) through the expenditures

approach, which of these two measures of investment spending would be appropriate? Explain.

LO2

Answer: Gross private domestic investment less depreciation is net private

domestic investment. Depreciation is the value of all the physical capital—

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Chapter 07 – Measuring Domestic Output and National Income

9. Use the concepts of gross investment and net investment to distinguish between an economy

that has a rising stock of capital and one that has a falling stock of capital. Explain: “Though net

investment can be positive, negative, or zero, it is impossible for gross investment to be less than

zero.” LO2

Answer: When gross investment exceeds depreciation, net investment is positive

and production capacity expands; the economy ends the year with more physical

10. Define net exports. Explain how U.S. exports and imports each affects domestic production.

How are net exports determined? Explain how net exports might be a negative amount. LO2

Answer: Net exports are a country’s exports of goods and services less its imports

of goods and services. The United States’ exports are as much a part of the

Consider the following values. If American exports are $7 billion and imports are

$5 billion, then American net exports are +$2 billion. If the figures are reversed,

11. Contrast the ideas of nominal GDP and real GDP. Why is one more reliable than the other for

comparing changes in the standard of living over a series of years? What is the GDP price index

and what is its role in differentiating nominal GDP and real GDP? LO5

Answer: Nominal GDP is a measure of the market or money value of all final goods and

services produced by the economy in a given year. We use money or nominal values as a

The answer is to adjust nominal GDP to take into account potential changes in prices.

This results in real GDP, where nominal GDP has been deflated or inflated to reflect

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Chapter 07 – Measuring Domestic Output and National Income

A price index is a measure of the price of a specified collection of goods and services,

12. Which of the following are included or excluded in this year’s GDP? Explain your answer in

each case. LO6

a. Interest received on an AT&T corporate bond.

b. Social Security payments received by a retired factory worker.

c. Unpaid services of a family member in painting the family home.

d. Income of a dentist from the dental services provided.

e. A monthly allowance a college student receives from home.

f. Money received by Josh when he resells his nearly brand-new Honda automobile to Kim.

g. The publication and sale of a new college textbook.

h. An increase in leisure resulting from a 2-hour decrease in the length of the workweek, with no

reduction in pay.

i. A $2 billion increase in business inventories.

j. The purchase of 100 shares of Google common stock.

Answer:

a. Included. Income received by the bondholder for the services derived by the

corporation for the loan of money.

b. Excluded. A transfer payment from taxpayers for which no service is

rendered (in this year).

13. LAST WORD What government agency compiles the U.S. NIPA tables? In what U.S.

department is it located? Of the several specific sources of information, name one source for each

of the four components of GDP: consumption, investment, government purchases, and net

exports.

Answer: The Bureau of Economic Analysis (BEA) in the Department of

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