GDP and Economic Growth

GDP excludes expenditures for:

• additions to inventories

• new housing

• government purchases of military equipment

• corporate stock

Answer explanation

Corporate stock is a certificate of ownership of a firm and does not represent production of final goods and services.

The "G" term in C + I_g + G + X_n includes all of the following except:

• state government purchases of new computers

• Social Security checks received by retirees

• salaries received by members of the military

• local government expenditures for building new roads

Answer explanation

Social Security checks are transfer payments—transfers of income from taxpayers to recipients—that does not represent a contribution to current production.

The income approach to GDP sums the total income earned by resource suppliers and:

• adds net transfer payments and personal taxes

• adds net investment and depreciation

• subtracts net foreign factor income but adds depreciation and taxes on production and imports

• net transfer payments, depreciation, and net foreign factor income

Answer explanation

The expenditure approach sums the value of all expenditures on domestically produced output. To match this, the income approach begins with national income—income earned by U.S.-supplied resources. However, to match GDP it must also include depreciation, taxes on production and imports, and subtract net foreign factor income.

Refer to the following data, which shows output and prices for five years of an economy that produces just one product. If Year 3 is the base year, the price index for year 4 is:

• 80

• 120

• 20%

• 1.2

Answer explanation

The price index is the ratio of the value of output in year 4 to the value of that same output in year 3 prices, multiplied by 100. In this example, the price index is [(9 x $6) / (9 x $5)] x 100, or 120.

The change in real GDP is not an accurate measure of the change in economic welfare because, for example:

• improvements in product quality are overstated

• expenditures for personal services are excluded

• the price level changes over time

• some production creates pollution

Answer explanation

To the extent that increased production degrades the environment, measured changes in output will fail to account for changes in economic well-being.

"The market value of all final goods and services produced within a nation in a given year." This best describes:

• Net domestic product

• Gross domestic product

• National income

• Personal income

Answer explanation

This is the definition of GDP. Net domestic product subtracts depreciation, while national income and personal income require further adjustments.

In calculating GDP:

• both exports and imports are added

• neither exports nor imports are added

• exports are added and imports are subtracted

• imports are added and exports are subtracted

Answer explanation

GDP measures the market value of all goods and services produced within the country in a year. Exported goods certainly meet this criterion and must be included. Consumption and other expenditures may include the value of goods produced elsewhere, so imports must be subtracted to obtain only that portion that reflects domestic production.

Suppose that last year domestic firms spent $80 billion on final purchases of plant and equipment, of which $15 billion replaced equipment that had worn out during the year. In addition, firms collectively added $10 billion to inventories and new construction totaled $35 billion. In calculating GDP, national income accountants would add gross investment of:

• $95 billion

• $100 billion

• $110 billion

• $125 billion

Answer explanation

Gross investment includes both inventory changes and depreciation as well as new construction. Net investment would not include the $15 billion for worn-out equipment.

Suppose nominal GDP in the base year was $380 billion. Five years later, nominal GDP was $480 and the GDP price index was 120. Over those five years, real GDP:

• increased by $20 billion

• increased by $96 billion

• increased by $80 billion

• did not change

Answer explanation

In the base year, real GDP and nominal GDP are equal. To calculate real GDP five years out, divide nominal GDP in that year by the price deflator and multiply the result by 100 to obtain real GDP = $400, a $20 billion increase from the base year.

Disposable income consists of:

• personal income plus personal taxes

• net domestic product minus personal taxes

• GDP corrected for inflation

• consumption plus saving

Answer explanation

Disposable income is personal income less personal taxes. As such, households are free either to spend it or save it.