1. Exercises Chapter 2 Measuring National Output and National Income

2. Discussions
1. The total market value of all final goods and services produced within a given period by factors of production located within a country is
gross domestic product
gross national product
net national product
net national income

3. Discussions 2. Gross domestic product measures
the total spending of everyone in the economy
the value of all output in the economy
the total income of everyone in the economy
All of the above

4. Discussions 4.Double counting can be avoided by
including the value of intermediate goods in the current year.
not counting the value of intermediate goods in GDP
including the value of intermediate goods in the GNP but not in the GDP
including the value of intermediate goods in the production year but not in the selling year of those goods

5. Discussions
5. Which of the following would NOT be counted in 2003's GDP?
The value of a 2001 car you purchase from a car dealer in 2003.
The 2003 salary of a used car salesperson
The commissions earned by a real estate agent in selling houses built prior to 2003
The value of a computer manufactured in 2003 but not sold in 2003

6. Discussions 6. Income of Mexican citizens earned in the U.S. counts in
U.S. GNP.
Mexican GNP
Mexican GDP
All of the above

7. Discussions 7. The equation for GDP using the expenditure approach is
GDP = C + I + G + EX - IM.
GDP = C + I + G + (IM - EX).
GDP = C + I + G + EX + IM
GDP = C + I + G - EX - IM

8. Discussions 8. The change in business inventories is measured as
final sales minus GDP.
final sales plus GDP
GDP minus final sales
the ratio of final sales to GDP

9. Discussions
8. In 2004 final sales equal $100 billion, and the change in business inventories is $20 billion.GDP in 2004 is
$120 billion.
$110 billion
$80 billion
cannot be determined from this information

10. Chapter 2 - Discussion
Table 1

11. Refer to Table 1, Personal consumption expenditures in billions of dollars are C = durable goods + non durable goods + services = 1650
2. Refer to Table 1, The value for gross private domestic investment in billions of dollars is I = Residential + Nonresidential + Changes in Inventory = 325
3. Refer to Table 1, The value for net exports in billions of dollars is Net export = Export – import = 500 – 150 = 350

12. 4. Refer to Table 1 The value of government spending in billions of dollars is G = Federal purchase of goods + States and local purchase of goods = GDP = = 550
5. Refer to Table 1 The value of gross domestic product in billions of dollars is GDP = C + I + G + (X – M) = GDP = = 2875

13. Chapter 2 - Discussion
Table 2.

14. 1, Refer to Table 2. The value for GDP in billions of dollars is GDP = C + I + G + x - M I = Gross investment = Net investment + depreciation = = 180 GDP = – 40 = 790
2. Refer to Table 2, The value for GNP in billions of dollars is GNP = GDP + receipts of factors of production from the rest of the world – payments of factors of production to the rest of the world = – 40 = 770

15. 3. Refer to Table 2. The value for NNP in billions of dollars is NNP= GNP – Depreciation = 770 – 30 = 740
4. Refer to Table 2, The value for national income in billions of dollars is National Income = NNP – Indirect taxes + subsidies
National income = 740 – = 740

16. 5. Refer to Table 2. The value for PI in billions of dollars is PI = NI – amount of income not going to the households + dividends = 740 – = 760
6. Refer to Table 2, The value for DPI in billions of dollars is DPI = PI – Personal taxes
DPI = 760 – 90 = 670

17. Table 3
Million $
Item
Corporate profits taxes
1785
Net investment
1550
Undistributed profits
960
Export
340
Social security payments to the households
350
Import
775
Depreciation
- 890
Net payments of factor income to the rest of the world
4235
Personal income
3250
Disposable personal income 12
Indirect taxes
900
Saving
3370
Government purchases
320
Production subsidies

18. 1, Refer to Table 3. The value for GDP in millions of dollars is GDP = C + I + G + x - M C = DPI - Saving = = 2350 Gross investment = net investment + depreciation = = 2560 GDP = – 350 = 8890
2. Refer to Table 3, The value for GNP in millions of dollars is GNP = GDP + Net payments of factor income to the rest of the world
= (- 890) = 8890 – 890 = 8000

19. 3. Refer to Table 3. The value for NNP in millions of dollars is NNP= GNP – Depreciation = 8000 – 775= 7225
4. Refer to Table 3, The value for national income in billions of dollars is National Income = NNP – (Indirect taxes – subsidies)
National income = 7225 – (12 – 320) = 7533

20. Chapter 2 - Discussion
Refer to the information provided in Table 4 below to answer the questions that follow.

21. 1, Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. The value for this economy's nominal GDP in year 1 Nominal GDP year 1 = Sum (P1 x q1)
Nominal GDP Y1
Prices = p
Production = q
P1 x q1
Year 3
Year 2
Year 1 50
1.2 1
100 75
Good x 60
0.75
0.6
130
Good y
110

22. Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. The value for this economy's nominal GDP in year 2 Nominal GDP year 2 = Sum (P2 x q2)
Nominal GDP Y2
Prices = p
Production = q
P2 x q2
Year 3
Year 2
Year 1 75
1.2 1
100 50
Good x
0.75
0.6
130
Good y
150

23. Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. The value for this economy's nominal GDP in year 3 Nominal GDP year 3 = Sum (P3 x q3)
Nominal GDP Y2
Prices = p
Production = q
P2 x q2
Year 3
Year 2
Year 1
120
1.2 1
100 75 50
Good x
130
0.75
0.6
Good y
250

24. Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's real GDP in year 2 is Real GDP12 = (P1 x q2)
Real GDP12
Prices = p
Production = q
P1 x q2
Year 3
Year 2
Year 1 75
1.2 1
100 50
Good x 60
0.75
0.6
130
Good y
135

25. Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's real GDP in year 3 is Real GDP 13 = (P1 x q3)
Real GDP13
Prices = p
Production = q
P1 x q3
Year 3
Year 2
Year 1
100
1.2 1 75 50
Good x 78
0.75
0.6
130
Good y
178

26. Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's real GDP in year 1 is Real GDP 11 = (P1 x q1)
Real GDP11
Prices = p
Production = q
P1 x q1
Year 3
Year 2
Year 1 50
1.2 1
100 75
Good x 60
0.75
0.6
130
Good y
110

27. Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 2 is the base year, the value for this economy's real GDP in year 1 is Real GDP21 = (P2 x q1)
Real GDP21
Prices = p
Production = q
P2 x q1
Year 3
Year 2
Year 1 50
1.2 1
100 75
Good x
0.75
0.6
130
Good y
125

28. Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 2 is the base year, the value for this economy's real GDP in year 2 is Real GDP22 = (P2 x q2)
Real GDP22
Prices = p
Production = q
P2 x q2
Year 3
Year 2
Year 1 75
1.2 1
100 50
Good x
0.75
0.6
130
Good y
150

29. Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 2 is the base year, the value for this economy's real GDP in year 3 is Real GDP23 = (P2 x q3)
Real GDP23
Prices = p
Production = q
P2 x q3
Year 3
Year 2
Year 1
100
1.2 1 75 50
Good x
97.5
0.75
0.6
130
Good y
197.5

30. Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 3 is the base year, the value for this economy's real GDP in year 1 is Real GDP31 = (P3 x q1)
Real GDP31
Prices = p
Production = q
P3 x q1
Year 3
Year 2
Year 1 60
1.2 1
100 75 50
Good x
0.75
0.6
130
Good y
160

31. Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 3 is the base year, the value for this economy's real GDP in year 2 is Real GDP32 = (P3 x q2)
Real GDP32
Prices = p
Production = q
P3 x q2
Year 3
Year 2
Year 1 90
1.2 1
100 75 50
Good x
0.75
0.6
130
Good y
190

32. Calculate GDP Deflator and Inflation in the following cases
If year 1 is the base year, the value of GDP deflator in year 2
( P2.q2 / P1.q2) x 100
( Nominal GDP in Y2 / Real GDP12) x 100
= ( 150 / 135 ) x 100 = 111.1
In this case the Inflation rate between year 1 and 2 = ـــ 100 = 11.1 %
If year 2 is the base year, the value of GDP deflator in year 1
( P1.q1 / P2.q1 ) x 100
( Nominal GDP in Y1 / Real GDP22 ) x 100
( 110 / 150 ) x 100 = 73.3

33. Calculating GDP Deflator and Inflation
If year 1 is the base year, the value of GDP deflator in year 1
( P1.q1 / P1.q1 ) x 100
( Nominal GDP in Y1 / Real GDP11) x 100
( 110 / 110 ) x 100 = 100
If year 2 is the base year, the value of GDP deflator in year 2
( P2.q2 / P2.q2 ) x 100
( Nominal GDP in Y2 / Real GDP 22) x 100
( 150 / 150 ) x 100 = 100

34. Calculate GDP Deflator and Inflation in the following cases
If year 1 is the base year, the value of GDP deflator in year 3
( P3.q3 / P1.q3) x 100
( Nominal GDP in Y3 / Real GDP13) x 100
= ( 250 / 178 ) x 100 = 140.4
In this case the Inflation rate between year 1 and 3 = ـــ 100 = 40.4%
If year 3 is the base year, the value of GDP deflator in year 1
( P1.q1 / P3.q1 ) x 100
( Nominal GDP in Y1 / Real GDP 31 ) x 100
( 250 / 160 ) x 100 = 156.2

35. Discussions The GDP deflator is the
difference between real GDP and nominal GDP multiplied by 100.
difference between nominal GDP and real GDP multiplied by 100
ratio of nominal GDP to real GDP multiplied by 100
ratio of real GDP to nominal GDP multiplied by 100