Question

Chapter Contents

Chapter Review
Key Terms and Concepts

national income accountingnational income accountinga uniform means of measuring economic performance national income accounting a uniform means of measuring economic performance
gross domestic product (GDP)gross domestic product (GDP)the measure of economic performance based on the value of all final goods and services produced within a country during a given period gross domestic product (GDP) the measure of economic performance based on the value of all final goods and services produced within a country during a given period
double countingdouble countingadding the value of a good or service twice by mistakenly counting the intermediate goods and services in GDP double counting adding the value of a good or service twice by mistakenly counting the intermediate goods and services in GDP
expenditure approachexpenditure approachcalculation of GDP by adding the expenditures by market participants on final goods and services over a given period expenditure approach calculation of GDP by adding the expenditures by market participants on final goods and services over a given period
consumptionconsumptionpurchases of final goods and services consumption purchases of final goods and services
nondurable goodsnondurable goodstangible items consumed in a short period of time, such as food nondurable goods tangible items consumed in a short period of time, such as food
durable goodsdurable goodslonger-lived consumer goods, such as automobiles durable goods longer-lived consumer goods, such as automobiles
services
investmentinvestmentthe creation of capital goods to augment future production investment the creation of capital goods to augment future production
fixed investmentfixed investmentall new spending on capital goods by producers fixed investment all new spending on capital goods by producers
producer goodsproducer goodscapital goods that increase future production capabilities producer goods capital goods that increase future production capabilities
inventory investmentinventory investmentpurchases that add to the stocks of goods kept by the firm to meet consumer demand inventory investment purchases that add to the stocks of goods kept by the firm to meet consumer demand
factor paymentsfactor paymentswages (salaries), rent, interest payments, and profits paid to the owners of productive resources factor payments wages (salaries), rent, interest payments, and profits paid to the owners of productive resources
gross national product (GNP)gross national product (GNP)the difference between net income of foreigners and GDP gross national product (GNP) the difference between net income of foreigners and GDP
depreciationdepreciationannual allowance set aside to replace worn-out capital depreciation annual allowance set aside to replace worn-out capital
net national product (NNP)net national product (NNP)GNP minus depreciation net national product (NNP) GNP minus depreciation
indirect business taxesindirect business taxestaxes, such as sales tax, levied on goods and services sold indirect business taxes taxes, such as sales tax, levied on goods and services sold
national income (NI)national income (NI)a measure of income earned by owners of the factors of production national income (NI) a measure of income earned by owners of the factors of production
personal income (PI)personal income (PI)the amount of income received by households before personal taxes personal income (PI) the amount of income received by households before personal taxes
disposable personal incomedisposable personal incomethe personal income available after personal taxes disposable personal income the personal income available after personal taxes
real gross domestic product per capitareal gross domestic product per capitareal output of goods and services per person real gross domestic product per capita real output of goods and services per person

Chapter Contents

Chapter Review
Problems

1.

Answer the following questions about GDP.

What is the definition of GDP?

Why does GDP measure only the final value of goods and services?

Why does GDP measure only the value of goods and services produced within a country?

How does GDP treat the sales of used goods?

How does GDP treat sales of corporate stock from one stockholder to another?

2.

Which of the following are included in GDP calculations?

Cleaning services performed by Molly Maid Corporation

Lawn-mowing services performed by a neighborhood child

Drugs sold illegally on a local street corner

Prescription drugs manufactured in the United States and sold at a local pharmacy

A rug woven by hand in Turkey

Air pollution that diminishes the quality of the air you breathe

Toxic-waste cleanup performed by a local company

Car parts manufactured in the United States for a car assembled in Mexico

A purchase of 1,000 shares of IBM stock

Monthly Social Security payments received by a retiree

Answer 1

Answer 1:

a. Gross Domestic Product (GDP) refers to the monetary value of all finished goods and services produced within a country's borders in a specific time period.

b. To avoid double counting in the calculation of GDP, only final value of goods and services is considered in GDP.

c. GDP measures only the value of goods produced within an economy because GDP measures domestic output of a nation and therefore must exclude goods and services produced in other countries even when the goods are produced by domestic companies in foreign nation.

d. The value of used goods was included in GDP when the goods were newly produced, thus sales of used goods is not counted in the GDP of a nation even though the sales commission in such goods will be counted in the GDP of the nation.

e. Since such sales are not payments for newly produced goods and services, thus such sales simply rearrange existing ownership claims and thus are not counted in GDP calculation of the nation even though sales commission is a part of the newly produced goods and services and thus considered a part of GDP calculation.