1
Measuring Domestic Output
National Income
True or False:
1) The gross domestic product (GDP) is the market value of all goods and services produced by the economy in one year.
2) A product that was produced in 2000 and not sold until 2001 is counted as part of GDP in 2001.
3) Value added can be determined by adding the purchase of intermediate products to the value of the sales of final products.
4) The value of a sale of a share of stock is considered to be an investment in national income accounting.
5) Gross private domestic investment can be divided into replacement investment and net investment.
6) Changes in business inventories are excluded from the definition of investment in the national income accounts.
7) In an economy, the value of inventories rose from kd 275 million in 2000 to kd 300 million in 2001. In calculating total investment for 2001, national income accountants would increase it by kd 25 million.
8) Government purchases exclude spending by the government for resources such as labor.
9) Net exports are positive when exports are greater than imports.
10) Adding indirect business taxes to national income equals GDP.
11) Transfer payments such as social security or unemployment compensation are counted in the calculation of GDP.
12) GDP tends to understate economic welfare because it does not take into account increases in leisure.
13) The value of the personal labor time spent repairing a home is included in GDP.
Multiple Choice:
1) Which is a primary use for national income accounting?
A)to analyze the environmental cost of economic growth
B)to assess the economic efficiency of specific industries in the economy
C)to measure changes in the value of goods and services produced in the economy
D)to determine whether there is a fair and equitable distribution of income in the economy
2) GDP is the market value of:
A)economic resources used in the production of annual output in an economy.
B)all final goods and services produced in an economy in a given year.
C)consumption and investment spending in an economy in a given year.
D)national income distributed to producers, consumers, and investors in an economy.
3) The monetary value of all final goods and services produced by theKuwaiti economy during a year is:
A)NDP.
B)GDP.
C)NI.
D)DI .
4) Adding the market value of all final and intermediate goods and services in an economy in a given year would result in:
A)the calculation of GDP for that year.
B)the calculation of NDP for that year.
C)an amount less than GDP for that year.
D)an amount greater than GDP for that year.
5) An example of a final good in national income accounts would be a new:
A)automobile purchased by a travel agency.
B)tractor purchased by a construction company.
C)microcomputer purchased by an executive for personal use.
D)microcomputer purchased by an executive for business use.
6) An example of an intermediate good or service would be:
A)a calculator purchased by a college student for taking exams.
B)gasoline used by an insurance agent visiting clients.
C)a house bought by a banking executive with five children.
D)a boat bought by a medical doctor for use on vacation.
7) Which is included in GDP?
A)used autos purchased by consumers
B)social security payments
C)telephone service for a home
D)bread for a restaurant
8) The value of corporate stocks and bonds traded in a given year is:
A)included in the calculation of GDP because they make a contribution to the current production of goods and services.
B)excluded from the calculation of GDP because they make no contribution to current production of goods and services.
C)included in the calculation of net private domestic investment.
D)included in the calculation of gross private domestic investment.
9) Which would be considered an investment according to economists?
A)the buying of shares of Janus mutual funds
B)the purchase of a new machine by Ford
C)the purchase of stock in MacDonald's
D)the selling of IBM corporate bonds
10) From an economist's perspective, which is not considered to be an investment?
A)construction of a new factory
B)purchase of shares of company stock
C)the building of an apartment complex
D)additions to inventories at steel plants
11) Gross private domestic investment is the value of capital goods and buildings that are produced that year:
A)plus residential construction and changes in business inventories.
B)plus the consumption of fixed capital and indirect business taxes.
C)minus changes in business inventories.
D)plus the consumption of fixed capital.
12) In an economy, the value of inventories rose from kd 100 million in 2000 to kd 150 million in 2001. In calculating total investment for 2001, national income accountants would:
A)decrease it by kd 50 million.
B)increase it by kd 50 million.
C)decrease it by kd 100 million.
D)increase it by kd 150 million.
13) A distinguishing characteristic of public transfer payments is that:
A)they are used to subsidize water and electricity provided to the public .
B)they are counted as part of government purchases in the calculation of the
gross domestic product.
C)there is a tax on the amount of the subsidy above a certain income level
D)the recipients make no contribution to current production in return for them.
14) Computation of gross domestic product by the expenditure method would include the purchase of:
A)fertilizer by a farmer.
B)cement by a construction company.
C)land by the Ministry of Health.
D)government bonds by a commercial bank.
15) When gross investment is positive, net investment:
A)is always zero.
B)must be negative.
C)must be positive.
D)may be either positive or negative.
16) The consumption of fixed capital in each year's production is called:
A)indirect business taxes.
B)inventory reduction.
C)depreciation.
D)investment.
17) In an economy experiencing expanding production capacity:
A)depreciation is greater than gross private domestic investment.
B)gross private domestic investment is greater than depreciation.
C)nominal GDP is rising and real GDP is falling.
D)nominal GDP is rising and real GDP is constant.
18) The expenditures or output approach to GDP measures it by summing:
A)compensation of employees, rents, interest, dividends, undistributed corporate profits, proprietors' income, indirect business taxes paid, consumption of fixed capital, and net foreign factor income earned in Kuwait.
B)compensation of employees, rents, interest, dividends, corporate profits, proprietors' income, and indirect business taxes, and subtracting the consumption of fixed capital.
C)the total spending for consumption, investment, net exports, and government purchases.
D)the total spending for consumption and government purchases, but subtracting public and private transfer payments.
19) Value added is the value of a firm's output minus:
A)the value of intermediate goods purchased from other firms.
B)the compensation it pays to employees.
C)the value of its capital goods.
D)its depreciation.
20) A business buys kd 5,000 worth of resources to produce a product. The business makes 100 units of the product and each of them sells for kd 65. The value added by the business to these products is:
A)kd 5,000
B)kd 6,500
C)kd 1,500
D)kd 1,000
21) Consider the following data for a firm over a period of time:
Total Revenuekd 50,000
Total Costkd 45,000
Supplieskd 10,000
Wages and salarieskd 35,000
Profitkd 5,000
The contribution of the firm to domestic output by the value-added method is:
A)kd 5,000
B)kd 40,000
C)kd 45,000
D)kd 50,000
22) The approach to measuring GDP that adds together compensation to employees, rents, interest income, dividends, undistributed corporate profits, proprietors' income, indirect business taxes, the consumption of fixed capital, and net foreign factor income earned in Kuwait is the:
A)output approach.
B)expenditure approach.
C)value-added approach.
D)income approach.
23) The income approach to GDP sums the total income earned by resource suppliers, adds the net foreign factor income earned in Kuwait, adds the consumption of fixed capital, and also adds:
A)net investment.
B)indirect business taxes.
C)government purchases.
D)the value of financial transactions.
24) In calculating NDP which should be excluded?
A)dividends
B)rental incomes
C)interest payments
D)depreciation allowances
25) Which is included in the GDP but not in national income?
A)consumption of fixed capital
B)corporate dividends
C)undistributed corporate profits
D)personal income taxes
26) How do corporations usually allocate corporate profits?
A)They are distributed to banks as interest.
B)They are paid to the government as indirect business taxes.
C)They are paid to proprietors as income or to bondholders as interest.
D)They are retained by the corporation or paid to stockholders as dividends .
Problems:
( 1 )What is the value added by all the firms A–E from the production of a product as described below? What did each firm add separately in value and what does it total?
Stage of productionSales value of product
Firm Akd 1,600
Firm B2,500
Firm C3,700
Firm D5,200
Firm E7,600
( 2 ) The following is a list of figures for a given year in millions of dinars. Using this data, compute: (a) GDP; (b) NDP; (c) NI; (d) PI; (e) DI; (f) Net exports.
Transfer payments...... kd 16
Government purchases...... 80
Personal taxes...... 38
Corporate income taxes...... 28
Indirect business taxes...... 15
Social security contributions...... 8
Undistributed corporate profits...... 19
Proprietor’s income……………………....25
Compensation of employees...... 258
Personal consumption expenditures....322
Consumption of fixed capital...... 4
Rents...... 10
exports...... 14
Corporate profits...... 70
Interest...... 12
Dividends...... 23
Imports...... 17
Gross private domestic investment...... 63
Net foreign factor income………………..10
( 3 )Below is a list of domestic output and national income figures for a given year. 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.
Personal consumption expenditure / Kd 245Net foreign factor income / 4
Transfer payments / 12
Rents / 14
Consumption of fixed capital / 27
Social security contributions / 20
Interest / 13
Proprietors’ income / 33
Net exports / 11
Dividends / 16
Compensation of employees / 223
Indirect business taxes / 18
Undistributed corporate profits / 21
Personal taxes / 26
Corporate income taxes / 19
Corporate profits / 56
Government purchases / 72
Net private domestic investment / 33
Personal saving / 20
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 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 .
Essay Questions:
- Why do economists worry about “multiple counting” and calculate only the “value added” in the production process?
- Identify at least four transactions and other variables which are not included in the Gross Domestic Product.
- Net investment can be positive, negative, or zero, but gross investment can never be less than zero. Explain.
- Which of the following are included and which are excluded in calculating this year’s GDP? Explain in each instance.
(a) A monthly scholarship check received by an economics student
(b) The purchase of a new corncrib by a farmer
(c) The purchase of a used tractor by a farmer
(d) The cashing in of a savings bond
(e) The services of a mechanic in fixing the radiator in his own car
(f) Social security checks received by a retired person
(g) An increase in business inventories
(h) Government purchase of missiles
(i) A barber’s income
(j) Income received from interest on a corporate bond
(k)Cash received from selling a corporate bond