Chapter 07 – Measuring Domestic Output and National Income
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Chapter 07 Measuring Domestic Output and National Income
QUESTIONS
1. In what ways are national income statistics useful? LO1
Answer: National income accounting does for the economy as a whole what private
accounting does for businesses. Firms measure income and expenditures to assess their
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, computers. If the
production of oranges increases by 100 percent and that of computers by 10 percent, it
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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.
Cotton fibers are usually an intermediate good. The cotton fibers are used to produce
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 goods.
If intermediate goods were counted, then multiple counting would occur. The value of
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
6. Provide three examples of each: consumer durable goods, consumer nondurable goods, and
services. LO1
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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 2010. How would this affect the size of gross private domestic
investment and gross domestic product in 2010? Explain. LO1
Answer: Anything produced by business that has not been sold during the accounting
period is something in which business has invested—even if the “investment” is
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—machines, equipment,
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
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Answer: When gross investment exceeds depreciation, net investment is positive and
10. Define net exports. Explain how U.S. exports and imports each affect 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 nation’s
production as are the expenditures of its own consumers on goods and services made in
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? LO3
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
common denominator in order to sum that heterogeneous output into a meaningful total.
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12. Which of the following are included or excluded in this year’s GDP? Explain your answer in
each case. LO4
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.
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 Commerce
compiles GDP statistics.
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PROBLEMS
1. Suppose that annual output in year 1 in a 3-good economy is 3 quarts of ice cream, 1 bottle of
shampoo, and 3 jars of peanut butter. In year 2, the output mix changes to 5 quarts of ice cream, 2
bottles of shampoo, and 2 jars of peanut butter. If the prices in both years are $4 per quart for ice
cream, $3 per bottle of shampoo, and $2 per jar of peanut butter, what was the economy’s GDP in
year 1? What was its GDP in year 2? LO1
Feedback: Consider the following example. Suppose that annual output in year 1 in a 3-
good economy is 3 quarts of ice cream, 1 bottle of shampoo, and 3 jars of peanut butter.
In year 2, the output mix changes to 5 quarts of ice cream, 2 bottles of shampoo, and 2
jars of peanut butter. If the prices in both years are $4 per quart for ice cream, $3 per
bottle of shampoo, and $2 per jar of peanut butter, what was the economy’s GDP in year
1? What was its GDP in year 2?
2. If in some country personal consumption expenditures in a specific year are $50 billion,
purchases of stocks and bonds are $30 billion, net exports are -$10 billion, government purchases
are $20 billion, sales of second-hand items are $8 billion, and gross investment is $25 billion,
what is the country’s GDP for the year? LO1
Feedback: Consider the following example. If in some country personal consumption
expenditures in a specific year are $50 billion, purchases of stocks and bonds are $30
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3. Assume that a grower of flower bulbs sells its annual output of bulbs to an Internet retailer for
$70,000. The retailer, in turn, brings in $160,000 from selling the bulbs directly to final
customers. What amount would these two transactions add to personal consumption expenditures
and thus to GDP during the year? LO1
Feedback: Consider the following example. Assume that a grower of flower bulbs sells
its annual output of bulbs to an Internet retailer for $70,000. The retailer, in turn, brings
4. To the right is a list of domestic output and national income figures for a certain year. All
figures are in billions. The questions that follow ask you to determine the major national income
measures by both the expenditures and the income approaches. The results you obtain with the
different methods should be the same. LO2
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a. Using the above data, determine GDP by both the expenditures and the income approaches.
Then determine NDP.
b. Now determine NI in two ways: first, by making the required additions or subtractions from
NDP; and second, by adding up the types of income and taxes that make up NI.
c. Adjust NI (from part b) as required to obtain PI.
d. Adjust PI (from part c) as required to obtain DI.
Feedback: Consider the following example. To the right is a list of domestic output and
national income figures for a certain year. All figures are in billions. The questions that
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Part a:
Using the above data, determine GDP by both the expenditures and the income
approaches. Then determine NDP.
The income approach: GDP = $223 (compensation of employees) + $14 (Rents) + $13
(Interest) + $33 (Proprietor’s income) + $56 (Corporate profits) + $18 (Taxes on
production and imports) + $27 (Consumption of fixed capital, depreciation) – $4 (Net
foreign factor income) + $8 (Statistical discrepancy) = $223 + $14 + $13 + $33 + $56 +
$18 + $27 -$4 + $8 = $388
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5. Using the following national income accounting data, compute (a) GDP, (b) NDP, and (c) NI.
All figures are in billions. LO2
Feedback: Consider the following example. Using the following national income
accounting data, compute (a) GDP, (b) NDP, and (c) NI. All figures are in billions.
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Part a:
Using the expenditures approach, GDP = $219.1 (Personal consumption expenditures) +
$52.1 (Net private domestic investment) + $11.8 (Consumption of fixed capital) + $59.4
(Government purchases) + $17.8 (U.S. exports of goods and services) – $16.5 (U.S.
Imports of goods and services) = $343.7.
We have the following table summarizing these steps.
(a) Personal consumption expenditures (C)
$219.1
Government purchases (G)
59.4
Gross private domestic investment (Ig)
63.9
(52.1 + 11.8)
Gross domestic product (GDP)
$343.7
(b) Consumption of fixed capital
Net domestic product (NDP)
$331.9
(c) Net foreign factor income earned in U.S.
Statistical discrepancy
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6. Suppose that in 1984 the total output in a single-good economy was 7000 buckets of chicken.
Also suppose that in 1984 each bucket of chicken was priced at $10. Finally, assume that in 2005
the price per bucket of chicken was $16 and that 22,000 buckets were produced. Determine the
GDP price index for 1984, using 2005 as the base year. By what percentage did the price level, as
measured by this index, rise between 1984 and 2005? What were the amounts of real GDP in
1984 and 2005? LO3
Feedback: Consider the following example. Suppose that in 1984 the total output in a
single-good economy was 7000 buckets of chicken. Also suppose that in 1984 each
bucket of chicken was priced at $10. Finally, assume that in 2005 the price per bucket of
To determine the GDP price index for 1984 using 2005 as a base year we proceed as
follows:
First, multiply the buckets of chicken in 2005 by the price of a bucket of chicken in 2005,
which gives is the value $352,000 = $16 x 22,000. (We would do this for all goods and
add up each value.)
Second, multiply the buckets of chicken in 2005 by the price of a bucket of chicken in
1984, which gives us $220,000 = $10 x 22,000. (We would do this for all goods and add
up each value. Be sure to use the 2005 quantities and the 1984 prices).
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7. The following table shows nominal GDP and an appropriate price index for a group of selected
years. Compute real GDP. Indicate in each calculation whether you are inflating or deflating the
nominal GDP data. LO3
Feedback: Consider the following example. The following table shows nominal GDP
and an appropriate price index for a group of selected years. Compute real GDP. Indicate
in each calculation whether you are inflating or deflating the nominal GDP data.
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Real GDP can be found by dividing nominal GDP by the price index (decimal form) for
that year. If the price index is below 100 you, are inflating GDP, and if the price level is
above 100, you are deflating GDP.
8. Assume that the total value of the following items is $600 billion in a specific year for Upper
Mongoose: net exports = $50 billion; value of new goods and services produced in the
underground economy = $75 billion; personal consumption expenditures = $300 billion; value of
the services of stay-at-home parents = $25 billion; gross domestic investment = $100 billion;
government purchases = $50 billion. What is Upper Mongoose’s GDP for the year? What is the
size of the underground economy as a percentage of GDP? By what percentage would GDP be
boosted if the value of the services of stay-at-home spouses were included in GDP? LO4
Feedback: Consider the following example. Assume that the total value of the following
items is $600 billion in a specific year for Upper Mongoose: net exports = $50 billion;