Chapter 24 Study Questions

1. In what ways are national income statistics useful? The national income accounting is useful since it measures the economy s overall performance. It operates in much the same way for the economy as a whole, it helps companies to assess health of the economy by comparing levels of production at regular intervals, track the long run course of the economy to see whether it has grown, been constant, or declined, and formulate policies that will safeguard and improve the economy s health. 2. Explain why an economy s output, in essence, is also its income. To know whether an economy s output in essence is also its income, you have to realize that the final product approach and the value added approach are two ways of looking at the same thing. What is spent on making a product is income to those who helped make it. For instance, if 10 dollars is spent on manufacturing a suit, then 10 dollars is the total income derived from its production. This can be also seen and understood in terms of earnings or allocations approach, or the income approach.

6. Use the concepts of gross investment and net investment to distinguish between an economy that has a rising stock of capital and one that has a falling stock of capita. In 1933 net private domestic investment was minus $6 billion. This means that in that particular year the economy produced no capital goods at all. Do you agree? Why or why not? Explain: Though net investment can be positive, negative, or zero, it is quite impossible for gross investment to be less than zero. By the time when gross investment exceeds the depreciation point, net investment would be positive and the production capacity would expand. The economy ends the year with more physical capital than it had started with. Net investment would be zero and the production capacity would be static, and the economy ends the year with the SAME amount of physical capital. As for the first statement, it is completely wrong because you can t say that economy produced no new capital goods that year just because the net investment was a -6 billion dollar in that 1933. For the second statement, it is correct. It is true even when you consider when the net investment is highly negative since the depreciation would be well above 20 dollars. 7. Define net exports. Explain how U.S. exports and imports each affect domestic production. Suppose foreigners spend $7 billion on U.S. exports in a specific year and Americans spend $5 billion on imports from abroad in the same year. What is the amount of the United States net exports? Explain how net exports might be a negative amount.

Next exports is a nation s exports of goods less its imports of goods. For instance, in the US, exports are a part of the nation s production as are the expenditures of its own consumers on goods and services made in the US. Hence, the US exports must be included in the GDP whereas imports are produced in countries abroad, and are part of those countries GDP. When people in America purchase imports, these expenditures are not made in the US. Instead its made in countries like China and India. Statistically, if American exports are $7 billion, imports are $5 billion, then American net exports are plus $2 billion. Chapter 25 1. Why is economic growth important? Why could the difference between a 2.5 percent and a 3 percent annual growth rate be of great significance over several decades? Economic growth is important since it shows the increase in real GDP occurring over some time period, and the increase in real GDP per capita occurring over some time period. The difference between a 2.5% and a 3% annual growth rate would have significance over several decades since you're multiplying that by trillions of dollars. Therefore, 0.5 percent means a lot of money and a lot of economic activity. So over the long term the effect multiplies therefore if Country A had 2.5% growth while B had 3% growth then starting at 100, in ten years A would have 128 while B would have 134 a 6% more increase from ten years ago. 2. Suppose an economy s real GDP is $30,000 in year 1 and $31,2000 in year 2. What is the growth rate of its real GDP? Assume that population is 100 in year 1 and 102 in year 2. What is the growth rate of real GDP per capita? If an economy s real GDP is $30,000 in year 1 and $31,2000 in year 2, the growth rate of real GDP would be 4% [{$31,200 - $30,000)/$30,000) and the GDP per capita in year 1 would be $300 because $30,000/100. If we assume that the population is 100 in year 1 and 102 in year 2, the growth rate of GDP per capita is 1.956% because [($305.88 - $300)/300)] 3. (6)Suppose that Alpha and Omega have identically sized working-age populations but that annual hours of work are much greater in Alpha than in Omega. Provide two possible explanations. Whenever we look at annual hours of work between two companies, here in which is between Alpha and Omega, we have to consider the labor inputs versus labor productivity. First of all, the growth of labor productivity is important to the economic growth of Alpha and Omega since I has been the major significant factor. There are five factors that, together, appear to explain the productivity growth rates technological advance, the amount of capital each workers has to work with, education and training, economies of scale, and resource allocation by the nation.

4. (7) Suppose that work hours in New Zombie are 200 in year 1 and productivity is $8 per hour worked. What is New Zombie s real GDP? If work hours increase to 210 in year 2 and productivity rises to $10 per hour, what is New Zombie s rate of economic growth? Not so sure If the work hours in New Zombie are 200 in year 1 and productivity is $8 per hour worked, the real GDP would be $1688 since 211 x 8. As for the GDP for year 2, it would be $1612.5 since 215 x 7.5.