Macroeconomics Study Set 63

Business

Quiz 7 :

Measuring Domestic Output and National Income

Quiz 7 :

Measuring Domestic Output and National Income

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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 thaT22,000 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?
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The information of price and output is reproduced below:
img Price index is a measure of the price of a specified collection of goods and services, called "a market basket," in a given year (1984) as computed to the price of an identical collection of goods and services in a reference year (2005).
img For the base year 2005 the price index iS100. The price change froM1984 to 2005 is calculated below:
img The price rose by 37.5% froM1984 to 2005.
The data table is reproduced below.
img Real GDP is calculated by multiplying the current output with the base year (2005) price.
img img

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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.
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Inventories are unconsumed outputs. For economists, all new output that is unconsumed is, by definition referred as capital. Investments measure the total change of newly created capital outputs that can increase future production. Inventories can be sold later and increases output. Thus, inventories are included as investments.
If inventories declined it is known as "drawing down of inventories". It means the economy sold out more output. We consider the decline in inventories as "negative investment" and subtract it from total investment of that year. This leads to a decrease in gross private investment and GDP. In this way, expenditures correctly measure the output.

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In what ways are national income statistics useful?
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National income statistics are very useful and it helps economists and policymakers to:
1. Assess the health of economy by comparing levels of production at regular intervals.
2. Track the long-run course of the economy to see whether it has grown, been constant or declined.
3. Formulate policies that will safeguard and improve the economy's health.

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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.
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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.
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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?
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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?
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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?
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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?
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Explain why an economy's output, in essence, is also its income
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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?
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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."
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Provide three examples of each: consumer durable goods, consumer nondurable goods, and services.
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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?
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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. img
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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?
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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.X img 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.
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Which of the following are included or excluded in this year's GDP? Explain your answer in each case.
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Using the following national income accounting data, compute (a) GDP, (b) NDP, and (c) NI. All figures are in billions. img
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Suppose that annual output in year 1 in a 3-good economy iS3 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?
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