Question

8a)

Rachel Jackson builds some apartment buildings. This expenditure is __________.

fixed investment

inventory investment

residential consumption

durable consumption

b)

__________ goods are goods that are not resold to someone else.

Final

Transfer

Intermediate

Consumer durable

c)

Spock is a simple economy in which all income is either compensation of employees or profits. There are no indirect taxes. Using the income approach, GDP is made up of which of the following?

Compensation of employees – profits – allowance for depreciation and obsolescence)

Compensation of employees – profits + (allowance for depreciation and obsolescence)

Compensation of employees + profits + allowance for depreciation and obsolescence)

Compensation of employees + profits – allowance for depreciation and obsolescence)

d)Which of the following would be included in this year’s GDP?

Last year’s construction of a car factory that will begin production this year

This year’s purchase of a share of Ford Motor Corporation’s common stock

Next year’s purchase of a car produced this year

This year’s purchase of a car produced last year

e)What is the difference between national income and domestic income?

Net taxes

Capital consumption allowance

Payments of factor income to the rest of the world

Net payments of factor income to the rest of the world

Answer 1

Part a) Construction of building is fixed investment. This is because the expenditure will provide benefit stream to Rachel Jackson over the years. Unlike consumption that provides one time benefit, investment creates a stream of benefits for several years.

Part b) Transfer good are the goods that are not resold to someone else. Final goods and consumer durable can be resold. In fact, existence of market for second hand goods proves this. Intermediate goods are sold to the firms that use these goods for the production of final goods.

Part c) GDP is made up of compensation of employees + profits – allowance for depreciation and obsolescence.

Part d) Gross domestic product (GDP) is the market value of total final goods and services that are produced during a year. So, this year’s GDP will include next year’s purchase of a car produced this year.

Part e) The difference between national income and domestic income is net payments of factor income to the rest of the world. This is because, while national income includes the income of residents, domestic income includes the income of non-residents in addition to residents provided the non-residents have earned the income within the domestic territory of the country.