Whitman ECON 102 - Measuring National Output and National Income

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The value added is $20, $40, $30 and $20 respectively.Personal Consumption = $5485.8Gross Private Domestic Investment = $1242.5Government Spending = $1452.7Net Exports = -$101GDP = $8080Indirect taxes are like sales taxes, customs duties, and license fees.GNP = 8000 + 250 - 300 = 7950NNP = 7950 - 900 = 7050NI = 7050 - 500 = 6550PI = 6550 - 500 - 700 + 300 + 1100 = 6750DI = 6750 - 1000 = 5750Table 6. 1Bread = 6 x $1 = $6Paper Clips = 10 x $.50 = $5Wine = 2 x $5 = $10Nominal GDP is thus the sum of the above figures - $21.The increase in real GDP from 1987 to 1988 is equal to ($26-$21)/$21 * 100% = 23.8%Bread will be valued at $3, paper clips at $10 and wine at $10 for a total of $23.The percentage increase in Real GDP is equal to ($26 - $23)/$23 x 100% = 13.0%.Therefore GNP = $9 trillion + $2 Trillion - $1 Trillion = $10 trillion.National Income = NNP + Subsidies - indirect taxes.Real GDP = Nominal GDPGDP Deflator / 10074. List some limitations of GDP as a measurement of social welfare.75. How would you adjust GDP to make it a better measure of social welfare?Test Item File 3: Principles of Macroeconomics 6(19) Measuring National Output and National Income Gross Domestic Product1. Define GDP in broad terms.GDP stands for Gross Domestic Product. It represents the total market value of acountry's output. It is the market value of all final goods and services produced within a given period of time by factors of production located within a country.Difficulty: E Type: D2. Why aren't intermediate goods counted in GDP?The reason is that if it weren't excluded the GDP figures would be double counting some production. That is to say that the market value of the final goodsalready reflects the value of the intermediate goods.Difficulty: E Type: C3. Explain what is meant by the concept of "value added" and how it can be used to calculate GDP.Value added simply refers to the difference between the value of goods as they leave a stage of production and the cost of the goods as they entered that stage. Ifyou add up the "value added" at each stage of the production process, the final value is equal to GDP.Difficulty: E Type: C100Test Item File 3: Principles of Macroeconomics4. Explain carefully the difference between GDP and GNP.Gross Domestic Product is the market value of all final goods and services produced within the confines of a country regardless of the national origin of the inputs that were used to produce the goods. Gross National Product by contrast measures the market value of all final goods and services produced within a given period by factors of production owned by the country's citizens, regardless of where the output is produced.Difficulty: M Type: C5. Suppose that your economics professor spent a week in Moscow delivering a series of lectures sponsored by the Russian government and a Russian professor spent a week inthe U.S. delivering a series of lectures sponsored by your university. How would each of these events be reconciled in the U.S. and Russian GDP and GNP accounts?The American economics professor's lecture would count as part of the U.S. GNPbecause it is output produced by an American input. It would also count as part of Russia's GDP since the lecture was delivered on Russian soil. Remember that GDP is prejudiced as to where the output is produced but is blind as to the national origin of the input. Just the reverse is true of the Russian professor's lecture in the U.S. His lecture would count as Russia's GNP and as U.S. GDP.Difficulty: M Type: C6. Using the above table, calculate the value added at each stage of the production process.The value added is $20, $40, $30 and $20 respectively.Difficulty: E Type: A7. The Bahamas is a group of islands whose economy relies heavily on tourism. The majority of the hotels and resorts in the islands are owned by foreign countries. Which do you think is larger, Bahamas' GDP or GNP? Explain why. Bahamas' GDP will exceed its GNP because GNP measures production by a nation's resources, regardless of location, whereas GDP measures output within the nation's boundaries. Much of the Bahamas' economic activities take place in the island. However, those activities are owned by foreign countries. 101Chapter 6 (19): Measuring National Output and National Income Difficulty: M Type: ACalculating GDP8. Based on the expenditure approach, discuss and explain each of the components of GDP. Personal consumption expenditures represent the purchase of final goods and services by the household sector. Gross Private Domestic investment represents spending by firms and households on new capital, changes in business inventories, and new residential structures. Government consumption and gross investment is the purchase of goods and services by the government at the federal, state, and local levels. And finally, net exports (exports - imports) represent the net sale of final goods and services to the rest of the world. Difficulty:M Type:C9. Explain why we must take into account changes in business inventories when calculating GDP. Changes in business inventories can be positive, negative, or zero. If they are positive, some goods produced in a given period were not purchased. Because GDP measures the value of the goods and services produced in a given period, we must take into account these goods that were produced but not sold. When the changes in business inventories is negative, some of the goods sold in a given period were produced in a previous period. For the same reason, we need to take this into account to obtain an accurate measure of economic activity for a GIVEN period. Dificulty:E Type: C10. Explain the relationship among gross investment, net investment, and depreciation. Gross investment is the total value of all newly produced capital goods produced in a given period. Depreciation represents the amount of the capital stock that wears out in a given period. Net investment, which is equal to gross investment minus depreciation, represents the extent to which the stock of capital changes ina given period. Dificultyf: M Type: D11. Briefly explain under what condition, if any, net investment can be negative. If so, 102Test Item File 3: Principles of Macroeconomicsexplain what this implies about the capital stock. Net investment equals gross investment minus depreciation. If depreciation is greater than gross investment, net investment will be negative. In such a situation, there is insufficient gross investment to offset the effects of


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