Tutorial 1: Measuring Domestic Output & National Income

Macroeconomics – COMC 21313

Academic Year – 2019/2020
Department of Commerce and Financial Management | University of Kelaniya

DISCUSSION QUESTIONS

1. In what ways are national income statistics useful?

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?

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?

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?

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

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

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

inventories declined by $1 billion during 2020. How would this $1 billion decrease
affect the size of gross private domestic investment and gross domestic product in
2020? Explain.

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.

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.”

10. Define net exports. How are net exports determined? Explain why net exports might
be a negative amount.
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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?

12. Which of the following are included in this year’s GDP? Which are excluded?
Explain your answers.
a. Interest received on corporate bonds.
b. Social Security payments received by a retired factory worker.
c. Unpaid services of a family member who painted the family home.
d. Income of a dentist from the dental services she provided.
e. A monthly allowance a college student receives from home.
f. Money received by Josh when he resells his nearly brand-new Honda automobile
to Kim.
g. The publication and sale of a new college textbook.
h. An increase in leisure resulting from a 2-hour decrease in the length of the
workweek, with no reduction in pay.
i. A $2 billion increase in business inventories.
j. Selling a used car for $ 10,000.

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.
a. income; expenditure.
b. value added; multiple Counting.
c. expenditure; income.
d. rents; profits.

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

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?
a. $1,150,000.
b. $1,100,000.
c. $1,000,000.

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d. $850,000.
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?
a. $0.
b. $10 billion.
c. $20 billion.
d. $30 billion.

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:
a. $17.0 trillion.
b. $16.0 trillion.
c. $15.5 trillion.
d. None of the above.

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:

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
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:
a. higher than 100.
b. lower than 100.
c. still 100.

9. Which of the following items will be included in official GDP statistics?

Select one or more answers from the choices shown.
a. Revenue generated by illegal hemp growers.
b. Money spent to clean up a local toxic waste site.
c. Revenue generated by legal medical hemp sales in California.
d. The dollar value of the annoyance felt by local citizens living near a noisy airport
in Georgia.

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e. Andre paying Ted for a haircut.

f. Emily and Aliya trading an hour of dance lessons for a haircut.

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?
b. What is the dollar value of economic activity taking place at every stage of
production and distribution?

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?

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?

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?

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.

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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.

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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?

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

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?

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