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Chapter 07 - Measuring Domestic Output and National Income
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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consent of McGraw-Hill Education.
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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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Chapter 07 - Measuring Domestic Output and National Income
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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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consent of McGraw-Hill Education.
Chapter 07 - Measuring Domestic Output and National Income
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
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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consent of McGraw-Hill Education.
Chapter 07 - Measuring Domestic Output and National Income
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
