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Chapter 15Gross Domestic ProductKey ConceptsSummary

Practice QuizInternet Exercises

2000 South-Western College Publishing

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In this chapter, you will

learn to solve theseeconomic puzzles:

Why doesnt economicgrowth include increases inspending for welfare,

Social Security, andunemployment programs?

Can one newscaster reportthat the economy grew,

while another reports for

the same year that theeconomy declined, and bothreports be correct?

How is the calculation ofnational output affected by

environmental damage?

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Who was Simon Kuznets?Published a report in 1934

titledNational Income,1929 -32,which explained

the first nationalaccounting system

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What is GrossDomestic Product?

GDP is the most widelyreported measure of anations economic

performance

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What doesGDP measure?The market value of allfinal goods and services

produced in a nation

during a period of time,usually a year

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What is Gross NationalProduct (GNP)?

GNP measures the marketvalue of all final goods andservices produced by a

nations residents, no matterwhere they are located

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What is an advantageof using GDP?

GDP measures valueusing dollars, ratherthan a list of the number

of goods and services

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Does GDP measuresecondhand transactions?

No, Current GDP does notinclude the sale of a usedcar or the sale of a homeconstructed some years ago

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What areIntermediate Goods?Goods and services used

as inputs for productionof final goods

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Does GDP countIntermediate Goods?

No, to avoid double counting,

GDP only measures finalgoods and services

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What are Final Goods?Finished goods and

services producedfor the ultimate user

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Does GDP measure

nonproductivefinancial transactions?

No, GDP does not countpurely private or publicfinancial transactions such

as giving gifts, stocks,bonds, or transfer payments

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What is aTransfer Payment?

A government payment toindividuals, not inexchange for goods or

services currently produced

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Does GDP measure the

whole economy?Yes, GDP consists of many

puzzle pieces to fittogether, includingmarkets for products,resources, consumers,workers, and businesses

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What is a

Circular Flow Model?A model that show us

how all the pieces ofthe puzzle fit together

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Product

markets

Households

Factormarkets

Businesses

Basic

CircularFlowModel

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What is a Flow?A rate of change in a

quantity during agiven time period

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What is a Stock?A quantity measured

at one point in time

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What additional sectorsdoes a complex Circular

Flow Model contain?

Financial markets Government

Foreign markets

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What Leakages arepresent in the more

Complex Model?

Household saving Household taxes paid

Income spent on imports

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What Injections arepresent in the moreComplex Model?

Business spending Government spending

Foreign spending

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What point is theEconomy tending toward?

Where the dollar value of

leakages equals thedollar value of injections

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What are the twoapproaches we use to

measure GDP?

ExpenditureIncome

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What is theExpenditure Approach?The national income

accounting method thatmeasures GDP by adding

all the spending for finalgoods and services

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GDP = C + I + G + (X - M)

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GDP using the Expenditure Approach1998

National IncomeAccounts

Percentage ofGDP

Consumption

Investment

Government

Exports - Imports

68%

15%

19%

-2%

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What is theIncome Approach?The method thatmeasures GDP byadding all incomes

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What are the Incomecomponents of GDP?GDP = Compensation ofemployees +rents +

profits +net interest +

nonincome adjustments

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What areNonincome Adjustments?

Capital consumptionallowances

Indirect business taxes

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GDP using the Income Approach1998

National IncomeAccounts

Percentageof GDP

Employee compensation

Rental income of persons

Net interest

Depreciation

59%

2%16%5%

Indirect business taxes

Profits

11%7%

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What is RentalIncome of Persons?Rent and royaltiesreceived by propertyowners who permit

others to use their assets

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What are Profits?Proprietors income

Corporate profits

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What is Net Interest?Interest earned from

loans to businesses

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What is Depreciation?An allowance for thecapital worn out

producing GDP

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What are IndirectBusiness Taxes?

Taxes levied as a percentageof the prices of goods soldand therefore become a

part of the revenuereceived by firms

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What are

Shortcomings of GDP?Nonmarket transactions

Distribution, kind, &quality of productsNeglect of leisure time Underground economy Economic bads

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What other national

accounts measureeconomic performance?Net National Product

National Income Personal Income

Disposable Personal IncomeNominal and Real GDP GDP Chain Price Index

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What is NetDomestic Product?

NDP is GDP minusdepreciation of thecapital worn out in

producing output

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What isNational Income?

NI is the total earned byresource owners,including wages, rents,

interest, and profits

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What isPersonal Income?

PI is the total income

received by householdsthat is available for

consumption, saving, andpayment of personal taxes

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What is DisposablePersonal Income?

DI is the amount of incomethat households have tospend or save after

payment of personal taxes

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What is Nominal GDP?

The value of all final goodsbased on the pricesexisting during the time

period of production

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What is Real GDP?The value of all final goodsproduced during a given

time period based on theprices existing in a

selected base year

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Real GDP =

nominal GDP x 100

GDP price index

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What is the

Chain Price Index?A measure that compares

changes in the prices of allfinal goods during a given

period to the prices ofthose goods in a base year

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Key Concepts

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Key Concepts

Who was Simon Kuznets? What is Gross Domestic Product?

What does GDP measure?

What is an advantage of using GDP?

Does GDP measure the whole economy?

What are the two approaches we use to

measure GDP?

What is the Expenditure Approach?

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Key Concepts cont.

What are the four sectors of GDP?

What is the Income Approach?

What are the Income components of GDP? What are Nonincome Adjustments?

What are Shortcomings of GDP?

What is Net Domestic Product? What is National Income?

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Summary Key Concepts cont.

What is Personal Income?

What is Disposable Personal Income?

What is Nominal GDP?

What is Real GDP?

What is the Chain Price Index?

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Summary

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GDP is the most widely used measureof a nations economic performance. GDP

is the market value of all final goodsproduced in the U.S. during a period oftime regardless of who owns the factors of

production. Secondhand and financialtransactions are not counted in GDP. Toavoid double counting, GDP also does not

include intermediate goods. GDP iscalculated by either the expenditureapproach or the income approach.

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GNP is the market value of finalgoods and services produced by U.S.residents, no matter where they arelocated. To reflect the increasing

integration of the U.S. into the globaleconomy, the Department ofCommerce changed its emphasis to

GDP in 1991.

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The circular flow model is a

diagram representing the flow ofproducts and resources betweenbusinesses and households inexchange for money payments.Flows must be distinguished fromstocks. Flows are measured in units

per time period, for example, dollars

per year. Stocks are quantities thatexist at a given point in timemeasured in dollars.

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Product

markets

Households

Factormarkets

Businesses

BasicCircular

FlowModel

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The expenditure approach sums

the four major spending componentsof GDP: consumption, investment,government, and net exports.

Algebraically, GDP = C + I + G +(X-M), where X equals foreignspending for domestic exports andM equals domestic spending forforeign products.

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The income approach sums the

major income components of GDP,consisting of compensation ofemployees, rents, profits net interest

and nonincome expenses fordepreciation and indirect businesstaxes. Indirect business taxes arelevied as a percentage of product

prices and include sales taxes,excise taxes, and customs duties.

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Net domestic product (NDP) isGDP minus depreciation

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National income (NI) is totalincome earned by households and iscalculated as NDP minus indirect

business taxes.

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Personal income (PI) is the totalincome received by households andis calculated as NI minus corporate

taxes and Social Security taxes plustransfer payments, net interest, anddividends.

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Disposable personal income(DI) is personal income minus

personal taxes. DI is the amount of

income a household has available toconsume or save.

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Nominal GDP measures allfinal goods and services produced in

a given time period of production.

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Real GDP measures all finalgoods and services produced in a

given time period, valued at theprices existing in a base year.

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The GDP chain price index is abroad price index used to convertnominal GDP to real GDP. The GDPchain price index measures changesin the prices of consumer goods,

business investment, governmentspending, exports, and imports. RealGDP is computed by dividing

nominal GDP for year X by year XsGDP chain price index and thenmultiplying the result by 100.

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Chapter 15 Quiz

2000 South-Western College Publishing

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1. The dollar value of all final goods and servicesproduced within the borders of a nation is the

a. GNP deflator.

b. gross national product.

c. net national product.

d. gross domestic product.

D. GDP is the most widely reported measure

of a nations economic performance. GDPexcludes production abroad by U.S. firms.

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2. Based on the circular flow model, moneyflows from businesses to households in

a. factor markets.

b. product markets.

c. neither factor nor product markets.

d. both factor and product markets.

A. Money flows from household to

businesses in product markets. Thereverse is true for factor markets.

3 The circular flow model does not include

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3. The circular flow model does not includewhich of the following?

a. The quantity of shoes in inventory onJanuary 1.

b. The total wages paid per month.

c. The percentage of profits paid out as

dividends each year.d. The total profits earned per year in

the U.S. economy.

A. The quantity of shoes in inventory is astock at one point in time rather than aflow over a period of time.

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4. The expenditure approach measuresGDP by adding all the expenditures for

final goods made bya. households.

b. businesses.

c. government.d. foreigners.e. all of the above.

E. One method national income

accountants use to calculate CDP is toadd all spending for the four sectors ofthe economy during a period of time.

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5. GDP is a less-than-perfect measure of thenations economic pulse because it

a. excludes nonmarket transactions.b. does not measure the quality of goods

and services.

c. does not report illegal transactions.d. all of the above.

D. GDP only measures legal markettransactions and adjustments for qualitychanges are very difficult or impossible.

6 S i f

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6. Subtracting an allowance fordepreciation of fixed capital from grossdomestic product yields

a. real GDP.

b. nominal GDP.

c. national income.

d. net domestic product.

D. Real GDP and nominal GDP includean estimate of depreciation. National

income is equal to net national productless indirect business taxes (e.g. salestaxes, federal excise taxes).

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7. Adding all incomes earned by householdsfrom the sale of resources yields

a. intermediate goods.b. indirect business taxes.

c. national income.

d. personal income.C. Intermediate goods and indirect

business taxes have nothing to do withadding incomes. Personal income is

the total income received byhouseholds. For example, PI includestransfer payments and NI does not.

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8. Personal income equals disposableincome plus

a. personal savings.

b. transfer payments.

c. dividend payments.

d. personal taxes.

D. Disposable income is the amount of income

that households actually have to spend orsave after payment of personal taxes.

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9. Disposal personal income

a. is the income people spend forpersonal items such as homes and cars.

b. includes transfer payments.

c. excludes transfer payments.

d. includes personal taxes.

B. DPI equals PI minus personal taxes.

Since PI includes transfer payments,DPI also includes transfer payments.

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10. Which of the following statements is true?

a. Leakages in an economy equal savings plus taxes plus

imports.b. National income is total income earned byhouseholds, whereas personal income is total incomereceived by households.

c. Disposable personal income equals personal incomeminus personal taxes.

d. The expenditures approach and the income approachyield the same GDP figure.

e. all of the above are true.

E. When money leaves the system, a leakage occurs.Personal income is both earned and unearned income.Disposable income is income left over after taxes.Expenditures will always equal income.

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11. Gross domestic product data that reflectactual prices as they exist in a given year

are expressed in terms ofa. fixed dollars.

b. current dollars.

c. constant dollars.d. real dollars.

B. Nominal GDP is also referred to as

current dollar or money GDP and is notadjusted for inflation.

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12. The GDP chain price index is

a. widely reported in the news.

b. broadly based.

c. adjusted for government spending.

d. a measure of changes in consumer prices.

B. The GDP chain price index not onlymeasures price changes of consumer goods,but also price changes of businessinvestment, government consumptionexpenditures, exports and imports.

13. Which of the following statements is true?

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a. The inclusion of intermediate goods andservices in GDP calculations would

underestimate our nations production level.b. The expenditures approach sums the

compensation of employees, rents, profits, netinterest, and non-income expenses for

depreciation and indirect business taxes.c. Real GDP has been adjusted for inflation or

deflation.

d. Real GDP equals nominal GDP multipliedby the GDP deflator.

C. The word real in front of any term meansthat the value has been adjusted.

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Internet Exercises

Click on the picture of the book,choose updates by chapter forthe latest internet exercises

http://www.swcollege.com/bef/tucker/tucker.html

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