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Chapter 15
Gross Domestic Product
Key Concepts
Summary
Practice Quiz
Internet Exercises
2000 South-Western College Publishing
2
In this chapter, you will
learn to solve these
economic puzzles:
Why doesnt economic
growth include increases in
spending for welfare,
Social Security, and
unemployment programs?
Can one newscaster report
that the economy grew,
while another reports for
the same year that the
economy declined, and both
reports be correct?
How is the calculation of
national output affected by
environmental damage?
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Who was Simon Kuznets?
Published a report in 1934
titled National Income,
1929 -32, which explained
the first national
accounting system
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What is Gross
Domestic Product?
GDP is the most widely
reported measure of a
nations economic
performance
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What does
GDP measure?
The market value of all
final goods and services
produced in a nation
during a period of time,
usually a year
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What is Gross National
Product (GNP)?
GNP measures the market
value of all final goods and
services produced by a
nations residents, no matter
where they are located
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What is an advantage
of using GDP?
GDP measures value
using dollars, rather
than a list of the number
of goods and services
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Does GDP measure
secondhand transactions?
No, Current GDP does not
include the sale of a used
car or the sale of a home
constructed some years ago
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What are
Intermediate Goods?
Goods and services used
as inputs for production
of final goods
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Does GDP count
Intermediate Goods?
No, to avoid double counting,
GDP only measures final
goods and services
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What are Final Goods?
Finished goods and
services produced
for the ultimate user
12
Does GDP measure
nonproductive
financial transactions?
No, GDP does not count
purely private or public
financial transactions such
as giving gifts, stocks,
bonds, or transfer payments
13
What is a
Transfer Payment?
A government payment to
individuals, not in
exchange for goods or
services currently produced
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Does GDP measure the
whole economy?
Yes, GDP consists of many
puzzle pieces to fit
together, including
markets for products,
resources, consumers,
workers, and businesses
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What is a
Circular Flow Model?
A model that show us
how all the pieces of
the puzzle fit together
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Product
markets
Households
Factor
markets
Businesses
Basic
Circular
Flow
Model
17
What is a Flow?
A rate of change in a
quantity during a
given time period
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What is a Stock?
A quantity measured
at one point in time
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What additional sectors
does a complex Circular
Flow Model contain?
Financial markets
Government
Foreign markets
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What Leakages are
present in the more
Complex Model?
Household saving
Household taxes paid
Income spent on imports
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What Injections are
present in the more
Complex Model?
Business spending
Government spending
Foreign spending
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What point is the
Economy tending toward?
Where the dollar value of
leakages equals the
dollar value of injections
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What are the two
approaches we use to
measure GDP?
Expenditure
Income
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What is the
Expenditure Approach?
The national income
accounting method that
measures GDP by adding
all the spending for final
goods and services
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What are the four
sectors of GDP?
Consumption
Investment
Government
Foreign (X - M)
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GDP = C + I + G + (X - M)
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GDP using the Expenditure Approach
1998
National Income
Accounts
Percentage of
GDP
Consumption
Investment
Government
Exports - Imports
68%
15%
19%
-2%
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What is the
Income Approach?
The method that
measures GDP by
adding all incomes
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What are the Income
components of GDP?
GDP = Compensation of
employees + rents +
profits + net interest +
nonincome adjustments
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What are
Nonincome Adjustments?
Capital consumption
allowances
Indirect business taxes
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GDP using the Income Approach
1998
National Income
Accounts
Percentage
of GDP
Employee compensation
Rental income of persons
Net interest
Depreciation
59%
2%
16%
5%
Indirect business taxes
Profits
11%
7%
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What is Compensation
of Employees?
Income earned from
wages, salaries, and
certain supplements
paid to labor
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What is Rental
Income of Persons?
Rent and royalties
received by property
owners who permit
others to use their assets
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What are Profits?
Proprietors income
Corporate profits
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What is Net Interest?
Interest earned from
loans to businesses
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What is Depreciation?
An allowance for the
capital worn out
producing GDP
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What are Indirect
Business Taxes?
Taxes levied as a percentage
of the prices of goods sold
and therefore become a
part of the revenue
received by firms
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What are
Shortcomings of GDP?
Nonmarket transactions
Distribution, kind, &
quality of products
Neglect of leisure time
Underground economy
Economic bads
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What other national
accounts measure
economic performance?
Net National Product
National Income
Personal Income
Disposable Personal Income
Nominal and Real GDP
GDP Chain Price Index
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What is Net
Domestic Product?
NDP is GDP minus
depreciation of the
capital worn out in
producing output
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What is
National Income?
NI is the total earned by
resource owners,
including wages, rents,
interest, and profits
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What is
Personal Income?
PI is the total income
received by households
that is available for
consumption, saving, and
payment of personal taxes
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What is Disposable
Personal Income?
DI is the amount of income
that households have to
spend or save after
payment of personal taxes
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What is Nominal GDP?
The value of all final goods
based on the prices
existing during the time
period of production
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What is Real GDP?
The value of all final goods
produced during a given
time period based on the
prices existing in a
selected base year
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Real GDP =
nominal GDP x 100
GDP price index
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What is the
Chain Price Index?
A measure that compares
changes in the prices of all
final goods during a given
period to the prices of
those goods in a base year
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Key Concepts
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Key Concepts
Who was Simon Kuznets?
What is Gross Domestic Product?
What does GDP measure?
What is an advantage of using GDP?
Does GDP measure the whole economy?
What are the two approaches we use to
measure GDP?
What is the Expenditure Approach?
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Key Concepts cont.
What are the four sectors of GDP?
What is the Income Approach?
What are the Income components of GDP?
What are Nonincome Adjustments?
What are Shortcomings of GDP?
What is Net Domestic Product?
What is National Income?
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Summary Key Concepts cont.
What is Personal Income?
What is Disposable Personal Income?
What is Nominal GDP?
What is Real GDP?
What is the Chain Price Index?
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Summary
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GDP is the most widely used measure
of a nations economic performance. GDP
is the market value of all final goods
produced in the U.S. during a period of
time regardless of who owns the factors of
production. Secondhand and financial
transactions are not counted in GDP. To
avoid double counting, GDP also does not
include intermediate goods. GDP is
calculated by either the expenditure
approach or the income approach.
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GNP is the market value of final
goods and services produced by U.S.
residents, no matter where they are
located. To reflect the increasing
integration of the U.S. into the global
economy, the Department of
Commerce changed its emphasis to
GDP in 1991.
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The circular flow model is a
diagram representing the flow of
products and resources between
businesses and households in
exchange for money payments.
Flows must be distinguished from
stocks. Flows are measured in units
per time period, for example, dollars
per year. Stocks are quantities that
exist at a given point in time
measured in dollars.
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Product
markets
Households
Factor
markets
Businesses
Basic
Circular
Flow
Model
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The expenditure approach sums
the four major spending components
of GDP: consumption, investment,
government, and net exports.
Algebraically, GDP = C + I + G +
(X-M), where X equals foreign
spending for domestic exports and
M equals domestic spending for
foreign products.
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The income approach sums the
major income components of GDP,
consisting of compensation of
employees, rents, profits net interest
and nonincome expenses for
depreciation and indirect business
taxes. Indirect business taxes are
levied as a percentage of product
prices and include sales taxes,
excise taxes, and customs duties.
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Net domestic product (NDP) is
GDP minus depreciation
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National income (NI) is total
income earned by households and is
calculated as NDP minus indirect
business taxes.
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Personal income (PI) is the total
income received by households and
is calculated as NI minus corporate
taxes and Social Security taxes plus
transfer payments, net interest, and
dividends.
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Disposable personal income
(DI) is personal income minus
personal taxes. DI is the amount of
income a household has available to
consume or save.
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Nominal GDP measures all
final goods and services produced in
a given time period of production.
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Real GDP measures all final
goods and services produced in a
given time period, valued at the
prices existing in a base year.
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The GDP chain price index is a
broad price index used to convert
nominal GDP to real GDP. The GDP
chain price index measures changes
in the prices of consumer goods,
business investment, government
spending, exports, and imports. Real
GDP is computed by dividing
nominal GDP for year X by year Xs
GDP chain price index and then
multiplying the result by 100.
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Chapter 15 Quiz
2000 South-Western College Publishing
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1. The dollar value of all final goods and services
produced within the borders of a nation is the
a. GNP deflator.
b. gross national product.
c. net national product.
d. gross domestic product.
D. GDP is the most widely reported measure
of a nations economic performance. GDP
excludes production abroad by U.S. firms.
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2. Based on the circular flow model, money
flows from businesses to households in
a. factor markets.
b. product markets.
c. neither factor nor product markets.
d. both factor and product markets.
A. Money flows from household to
businesses in product markets. The
reverse is true for factor markets.
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3. The circular flow model does not include
which of the following?
a. The quantity of shoes in inventory on
January 1.
b. The total wages paid per month.
c. The percentage of profits paid out as
dividends each year.
d. The total profits earned per year in
the U.S. economy.
A. The quantity of shoes in inventory is a
stock at one point in time rather than a
flow over a period of time.
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4. The expenditure approach measures
GDP by adding all the expenditures for
final goods made by
a. households.
b. businesses.
c. government.
d. foreigners.
e. all of the above.
E. One method national income
accountants use to calculate CDP is to
add all spending for the four sectors of
the economy during a period of time.
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5. GDP is a less-than-perfect measure of the
nations economic pulse because it
a. excludes nonmarket transactions.
b. does not measure the quality of goods
and services.
c. does not report illegal transactions.
d. all of the above.
D. GDP only measures legal market
transactions and adjustments for quality
changes are very difficult or impossible.
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6. Subtracting an allowance for
depreciation of fixed capital from gross
domestic product yields
a. real GDP.
b. nominal GDP.
c. national income.
d. net domestic product.
D. Real GDP and nominal GDP include
an estimate of depreciation. National
income is equal to net national product
less indirect business taxes (e.g. sales
taxes, federal excise taxes).
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7. Adding all incomes earned by households
from the sale of resources yields
a. intermediate goods.
b. indirect business taxes.
c. national income.
d. personal income.
C. Intermediate goods and indirect
business taxes have nothing to do with
adding incomes. Personal income is
the total income received by
households. For example, PI includes
transfer payments and NI does not.
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8. Personal income equals disposable
income plus
a. personal savings.
b. transfer payments.
c. dividend payments.
d. personal taxes.
D. Disposable income is the amount of income
that households actually have to spend or
save after payment of personal taxes.
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9. Disposal personal income
a. is the income people spend for
personal items such as homes and cars.
b. includes transfer payments.
c. excludes transfer payments.
d. includes personal taxes.
B. DPI equals PI minus personal taxes.
Since PI includes transfer payments,
DPI also includes transfer payments.
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10. Which of the following statements is true?
a. Leakages in an economy equal savings plus taxes plus
imports.
b. National income is total income earned by
households, whereas personal income is total income
received by households.
c. Disposable personal income equals personal income
minus personal taxes.
d. The expenditures approach and the income approach
yield the same GDP figure.
e. all of the above are true.
E. When money leaves the system, a leakage occurs.
Personal income is both earned and unearned income.
Disposable income is income left over after taxes.
Expenditures will always equal income.
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11. Gross domestic product data that reflect
actual prices as they exist in a given year
are expressed in terms of
a. fixed dollars.
b. current dollars.
c. constant dollars.
d. real dollars.
B. Nominal GDP is also referred to as
current dollar or money GDP and is not
adjusted for inflation.
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12. The GDP chain price index is
a. widely reported in the news.
b. broadly based.
c. adjusted for government spending.
d. a measure of changes in consumer prices.
B. The GDP chain price index not only
measures price changes of consumer goods,
but also price changes of business
investment, government consumption
expenditures, exports and imports.
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13. Which of the following statements is true?
a. The inclusion of intermediate goods and
services in GDP calculations would
underestimate our nations production level.
b. The expenditures approach sums the
compensation of employees, rents, profits, net
interest, and non-income expenses for
depreciation and indirect business taxes.
c. Real GDP has been adjusted for inflation or
deflation.
d. Real GDP equals nominal GDP multiplied
by the GDP deflator.
C. The word real in front of any term means
that the value has been adjusted.
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