Chapter 7 - Measuring Domestic Output and National Income

Chapter 7 - Measuring Domestic Output and National Income
McConnell, Brue, and Flynn 22e
DISCUSSION QUESTIONS
1. In what ways are national income statistics useful? LO1
National income data can be useful in measuring the equitableness of

distribution of income in the country.
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
Because different goods have specific price, so they take the total output (Q) as
the value for the goods. The solution of this problem is the Real GDP.
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
running shoes – final goods; cotton fibers – intermediate goods;
watches – final goods; textbooks – final goods; coal - intermediate goods;
sunscreen lotion – final goods; lumber - intermediate goods;
4. Why do economists include only final goods and services when measuring GDP?
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
-Because only new products should be counted in the GDP.
-Transactions in stocks or bonds are just transfer of ownership, they don’t
represent new production, so not included in GDP.
-If a fee is charged for carrying out the share or bond purchase, then the fee is
included in GDP as it represents a new service produced to facilitate the
transaction.
5. Explain why an economy’s output, in essence, is also its income. LO1

An economy's output is also its income because the economic players earn from
whatever is produced in the economy.
6. Provide three examples of each: consumer durable goods, consumer nondurable

goods, and services. LO2
Consumer durable goods: cars; dishwasher; fridge;
Consumer nondurable goods: bread; egg; chocolate;
7-1
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7. Why are changes in inventories included as part of investment spending? Suppose

inventories declined by $1 billion during 2022. How would this $1 billion decrease
affect the size of gross private domestic investment and gross domestic product in
2022? Explain. LO2
-As the change in inventories is a flow equal to the change in the stock of unsold
goods, they are a form of investment, often referred to as involuntary
investment.
-The decrease of $1 billion will affect GDP negatively, because it is part of the
GDP.
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
Gross private domestic investment is depreciation minus net private domestic

investment. Net domestic product is calculated by subtracting the GDP by
depreciation. Since we are not counting depreciation, net private domestic
investment would be appropriate.
9. Use the concepts of gross investment and net investment to distinguish between an
economy that has a rising capital stock and one that has a falling capital stock.
Explain: “Though net investment can be positive, negative, or zero, it is impossible
for gross investment to be less than zero.” LO2
Gross investment cannot be less than zero because it is the nation's total amount
of capital goods. Therefore, when the gross investment decreases, the net
investment depreciates, meaning that the value of capital goods will decrease in a
particular country.
10. Define net exports. How are net exports determined? Explain why net exports might
be a negative amount. LO2
Net exports are a measure of a nation's total trade;
Net exports = Exports – Imports;
It might be negative because a country might have more imports than exports;
11. Contrast 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? LO5
We calculate Nominal GDP only for a specific year, whereas we calculate Real
GDP to compare the changes of a specific period with the previous ones, and
that’s why Real GDP is more reliable.
7-2
GDP price index is the change in % of the price of a good in the specific year
with the base year. Real GDP = Nominal GDP / Price Index
12. Which of the following are included in this year’s GDP? Which are excluded?
Explain your answers. LO6
a. Interest received on an AT&T corporate bond. Included
b. Social Security payments received by a retired factory worker. Excluded
c. Unpaid services of a family member who painted the family home. Excluded
d. Income of a dentist from the dental services she provided. Included
e. A monthly allowance a college student receives from home. Excluded
f. Money received by Josh when he resells his nearly brand-new Honda automobile
to Kim. Excluded
g. The publication and sale of a new college textbook. Included
h. An increase in leisure resulting from a 2-hour decrease in the length of the
workweek, with no reduction in pay. Excluded
i. A $2 billion increase in business inventories. Included
j. The purchase of 100 shares of Alphabet (the parent company of Google) stock.
Excluded
REVIEW QUESTIONS
1. Tina walks into Ted’s sporting goods store and buys a punching bag for $100. That
$100 payment counts as ________________ for Tina and _______________ for Ted.
LO1
a. income; expenditure.
b. value added; multiple Counting.
c. expenditure; income.
d. rents; profits.
2. Which of the following transactions are counted in GDP? LO1

Select one or more of the answers from the choices shown.
a. Kerry buys a new sweater to wear this winter.
b. Patricia receives a Social Security check.
c. Roberto gives his daughter $50 for her birthday.
d. Nayana sells $1,000 of General Electric stock.
e. Jasmine buys a new car.
f. Molly buys a used car.
3. A small economy starts the year with $1 million in capital. During the course of the
year, gross investment is $150,000 and depreciation is $50,000. What is the
economy’s capital stock at the end of the year? LO2
a. $1,150,000.
b. $1,100,000. (1,000,000 + 150,000 – 50,000)
c. $1,000,000.
d. $850,000.
7-3
e. $800,000.
4. Suppose that this year a small country has a GDP of $100 billion. Also assume that Ig
= $30 billion, C = $60 billion, and Xn = - $10 billion. What is the value of G? LO3
a. $0.
b. $10 billion.
c. $20 billion.
d. $30 billion.
5. Suppose that California imposes a sales tax of 10 percent on all goods and services. A
Californian named Ralph then goes into a home improvement store in the state capital
of Sacramento and buys a leaf blower that is priced at $200. With the 10 percent sales
tax, his total comes to $220. How much of the $220 paid by Ralph will be counted in
the national income and product accounts as private income (employee compensation,
rents, interest, proprietor’s income, and corporate profits)? LO3
a. $220.
b. $200.
c. $180.
d. None of the above.
6. Suppose GDP is $16 trillion, with $10 trillion coming from consumption, $2 trillion
coming from gross investment, $3.5 trillion coming from government expenditures,
and $500 billion coming from net exports. Also suppose that across the whole
economy, depreciation (consumption of fixed capital) totals $1 trillion. From these
figures, we see that net domestic product equals: LO4
a. $17.0 trillion.
b. $16.0 trillion.
c. $15.5 trillion.
d. None of the above. (16-1 = 15)
7. Suppose GDP is $15 trillion, with $8 trillion coming from consumption, $2.5 trillion
coming from gross investment, $3.5 trillion coming from government expenditures,
and $1 trillion coming from net exports. Also suppose that across the whole economy,
personal income is $12 trillion. If the government collects $1.5 trillion in personal
taxes, then disposable income will be: LO4
a. $13.5 trillion.
b. $12.0 trillion.
c. $10.5 trillion.
d. None of the above.
8. Suppose that this year’s nominal GDP is $16 trillion. To account for the effects of
inflation, we construct a price-level index in which an index value of 100 represents
7-4
the price level 5 years ago. Using that index, we find that this year’s real GDP is $15
trillion. Given those numbers, we can conclude that the current value of the index is:
LO5
a. higher than 100. ( Real GDP have negative relationship with Price Index)
b. lower than 100.
c. still 100.
9. Which of the following items will be included in official U.S. GDP statistics? LO6
Select one or more answers from the choices shown.
a. Revenue generated by illegal marijuana growers.
b. Money spent to clean up a local toxic waste site in Ohio.
c. Revenue generated by legal medical marijuana sales in California.
d. The dollar value of the annoyance felt by local citizens living near a noisy airport
in Georgia.
e. Andre paying Ted for a haircut in Chicago.
f. Emily and Aliya trading an hour of dance lessons for a haircut in Dallas.
10. Suppose GDP is $5.0 trillion, depreciation is $1 trillion, and gross output (GO) is
$17.25 trillion.
a. What is the value of all stages of production and distribution except for final sales
of goods and services? 17.25 – 5 = $12.25 trillion
b. What is the dollar value of economic activity taking place at every stage of
production and distribution? $17.25 trillion
PROBLEMS
1. Suppose that annual output in year 1 in a three-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
Price Number Nominal Price Number Nominal

Year 1 of Value of Year 2 of Value of
Good Goods Goods Goods Goods
Year 1 Year 1 Year 2 Year 2
Quarts of Ice Cream $4.00 3 $12.00 $4.00 5 $20.00
Bottles of Shampoo $3.00 1 $3.00 $3.00 2 $6.00
Jars of Peanut Butter $2.00 3 $6.00 $2.00 2 $4.00
Nominal GDP $9.00 7 $21.00 $9.00 9 $30.00
7-5
2. 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
$160,000 of the retailer. (Sells to final customer)
3. 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 secondhand items are $8 billion, and
gross investment is $25 billion, what is the country’s GDP for the year? LO2
GDP = C + I + G + Nx
= 50 + 25 + 20 + (-10)
= 85
4. Below 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. LO4
= 245 + (33 + 27) + 72 + 11 NI = wages + rents + interest +
= 388
profits
NDP = GDP – depreciation Profits = corporate profits +
= 388 – 27 proprietor's income
= 361 profits
NI1 = NDP – S.discrepancy + N.f factor income Profits = 56 + 33 = 89

= 361 – 8 + 4 NI = 223 + 14 + 13 + 89 = 339
= 339
PI = NI - Taxes in import and production - Corporate income taxes - S.S

contributions - Und. Corporate profits + Transfer payments
= 339 – 12 – 19 – 20 – 21 + 12
= 279
DI = PI – Personal taxes
= 279 – 26
= 253
7-6
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.
5. Using the following national income accounting data, compute (a) GDP, (b) NDP,
and (c) NI. All figures are in billions. LO4
= 219.1 + 52.1 + 59.4 + (17.8 – 16.5)
= 331.9
NDP = GDP – Consumption of fixed capital

= 331.9 – 11.8
= 320.1
NI = NDP – Statistical discrepancy + Net foreign factor income

= 320.1 – 0 + 2.2
= 322.3
7-7
6. Suppose that in 1994 the total output in a single-good economy was 7,000 buckets of
chicken. Also suppose that in 1994 each bucket of chicken was priced at $10. Finally,
assume that in 2015 the price per bucket of chicken was $16 and that 22,000 buckets
were produced. Determine the GDP price index for 1994, using 2015 as the base
year. By what percentage did the price level, as measured by this index, rise between
1994 and 2015? What were the amounts of real GDP in 1994 and 2015? LO5
Price Index = (price per bucket of chicken in 1994/ price per bucket of chicken in 2015) x 100
= (10/16) x 100
= 62.5
Real GDP of 1994 = (P in 1994 x Q in 1994) / Price index

= 7000 x 10 / 62.5
= 1,120
Real GDP of 2015 = (P in 2015 x Q in 2015) / Price index

= 22,000 x 16 / 62.5
= 5,632
Rise in GDP = (GDP of 2015 / GDP of 1994) x 100

= (5,632 / 1,120) x 100
= 502.85%
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. LO5
7-8
Real GDP = Nominal GDP / Price Index
Real GDP 1978 = 2,293.8 / 40.40 = 56.777

Real GDP 1988 = 5,100.4 / 66.98 = 76.15
Real GDP 1998 = 8,793.5 / 85.51 = 102.84
Real GDP 2008 = 14,441.4 / 108.48 = 133.125
Real GDP 2018 = 20,501 / 128.59 = 159.42
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
increase if the value of the services of stay-at-home spouses were included in GDP?
LO6
GDP1 = C + I + G + Nx GDP2 = C + I + G + Nx + SAHP

= 300 + 100 + 50 + 50 = 300 + 100 + 50 + 50 + 25
= 500 = 525
GDP2 / GDP1 = (525 / 500) x 100

Underground economy / GDP = (25 / 500) x 100 = 1.05 x 100
= 0.05 x 100 = 105%
= 5%
7-9

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Chapter 7 - Measuring Domestic Output and National Income

Chapter 7 - Measuring Domestic Output and National Income

McConnell, Brue, and Flynn 22e

1. In what ways are national income statistics useful? LO1

National income data can be useful in measuring the equitableness of

5. Explain why an economy’s output, in essence, is also its income. LO1

6. Provide three examples of each: consumer durable goods, consumer nondurable

7. Why are changes in inventories included as part of investment spending? Suppose

Gross private domestic investment is depreciation minus net private domestic

2. Which of the following transactions are counted in GDP? LO1

Price Number Nominal Price Number Nominal

$160,000 of the retailer. (Sells to final customer)

3. If in some country personal consumption expenditures in a specific year are $50

NI1 = NDP – S.discrepancy + N.f factor income Profits = 56 + 33 = 89

PI = NI - Taxes in import and production - Corporate income taxes - S.S

NDP = GDP – Consumption of fixed capital

NI = NDP – Statistical discrepancy + Net foreign factor income

Real GDP of 1994 = (P in 1994 x Q in 1994) / Price index

Real GDP of 2015 = (P in 2015 x Q in 2015) / Price index

Rise in GDP = (GDP of 2015 / GDP of 1994) x 100

Real GDP = Nominal GDP / Price Index

Real GDP 1978 = 2,293.8 / 40.40 = 56.777

GDP1 = C + I + G + Nx GDP2 = C + I + G + Nx + SAHP

GDP2 / GDP1 = (525 / 500) x 100

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