Question

20a)

________ goods are those that firms buy for use as inputs in producing other goods or services and they ________ counted in GDP.

Final; are not

Intermediate; are

Final; are Final; are

Intermediate; are not

b)

Exland’s gross domestic product is the nominal value of which of the following?

Final production by Exland’s resources

Final production within Exland’s borders

Production within Exland’s borders

Production by Exland’s resources

c)

Many residents of West Virginia cross the border to work in Kentucky although few Kentuckians work in West Virginia. We should expect that West Virginia’s state GDP will be ________ than its GNP and that Kentucky’s state GDP will be ________than its GNP.

greater; smaller

smaller; greater

greater; greater

smaller; smaller

d)In the national income accounts, the construction of a new residence is counted as __________ and the value of the services it provides is counted as ___________.

investment; consumption

consumption; investment

consumption; consumption

investment; investment

e)Which of the following is included in the government purchases component of GDP?

Pay of active-duty soldiers

Veterans’ benefits paid to disabled former soldiers

Unemployment benefits to civilian workers

Both A and B, but not C

Answer 1

1. The intermediate goods are those goods which are used as inputs in the production of other goods to make the final goods or services and these are not counted in the computation of GDP as this will cause the problem of double counting because of their inclusion in GDP again at the end of the production line as final goods. (D)
2. The GDP of a country is the nominal value of goods and services produced in that country in a given year. The total output produced by a nation’s resources does get counted in the national product which includes the production outside the geographical boundaries but by the resources of the nation. Thus Exland’s GDP here will be the nominal value of final production of goods and services produced within the borders of the country. (C)
3. GNP consists of GDP and the net overseas activities performed by nationals. The latter can either be negative when a nation is getting less than paying to the foreigners for their services or positive when the net payables are less than what nationals earned abroad. Here, since more Virginia’s people are working in Kentucky while less of Kentucky people in Virginia, thus, it must be receiving more from Kentucky than it is paying for the Kentucky people implying that the net production from abroad is positive which would increase the GNP over the GDP, the reverse will be true for Kentucky, So, Virginia's GDP will be smaller than its GNP while Kentucky’s GDP will be greater than its GDP. (B)
4. The construction of a residence or simply a house which would stay in for a long period of time in the economy and is thus counted as the investment, while the value of services which are recurring in nature as it provides is thus counted as the consumption being recurring and non-long term value addition. (A)
5. The GDP includes those transactions which are not in the form of transfer payments. Transfer payments are those which are made without getting any service of good in return but as a social or government transfer. In this case, since unemployment benefits and the benefits to former soldiers are actually not providing any goods or services to the government in the current year thus would not be included in GDP’s government purchases components. The only item which will be included in the government purchases is the pay of the active soldiers as they are providing their services to the nation. (A)