 | Economics 14/e McConnell | |||||
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7-3 Why do national income accountants include only final goods in measuring GDP for a particular year? Why don’t they include the value of the stocks and bonds bought and sold? Why don’t they include the value of the used furniture bought and sold?
7-6 Use the concepts of gross and net investment to distinguish between economies in which production capacity is expanding static and declining. "In 1933 net private domestic investment was minus $6 billion. This means 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."
7-8 Below is a list of domestic output and national income figures for a given year. All figures are in billions. The questions which follow ask you to determine the major national income measures by both the expenditures and income methods. Results you obtain with the different methods should be equal.
| Personal consumption expenditures | $245 |
| Net foreign factor income earned in the U.S. | 0004 |
| Transfer payments | 0012 |
| Rents | 0014 |
| Consumption of fixed capital (depreciation) | 0027 |
| Social security contributions | 0020 |
| Interest | 0013 |
| Proprietors’ income | 0033 |
| Net exports | 0011 |
| Dividends | 0016 |
| Compensation of employees | 0223 |
| Indirect business taxes | 0018 |
| Undistributed corporate profits | 0021 |
| Personal taxes | 0026 |
| Corporate income taxes | 0019 |
| Corporate profits | 0056 |
| Government purchases | 0072 |
| Net private domestic investment | 0033 |
| Personal saving | 0020 |
7-11 Suppose that in 1984 the total output in a single-good economy was 7000 buckets of chicken. Also suppose that in 1984 each bucket of chicken was priced at $10. Finally assume that in 1992 the price per bucket of chicken was $16 and that 22 000 buckets were purchased. Determine the GDP price index for 1984 using 1992 as the base year. By what percentage did the price level as measured by this index rise between 1984 and 1992? Use the two methods listed in Table 7-6 to determine real GDP for 1984 and 1992.
7-12 The following table shows nominal GDP and an appropriate price index for a group of selected years. Compute real GDP. Indicate in each calculation whether you are inflating or deflating the nominal GDP data
| Year | Nominal GDP billions |
Price index (1992=100) | Real GDP billions |
| 1959 | $ 507.2 | 23.0 | $______ |
| 1964 | 663.0 | 24.6 | $______ |
| 1967 | 833.6 | 26.6 | $______ |
| 1973 | 1382.6 | 35.4 | $______ |
| 1988 | 5049.6 | 86.1 | $______ |
| 1995 | 7265.4 | 107.8 | $______ |
Answers:
| 7-3 They are excluded because the dollar value of final goods includes the dollar value of intermediate goods. If intermediate goods were counted then multiple counting would occur. The value of steel (intermediate good) used in autos is included in the price of the auto (the final product). This value is not included in GDP because such sales and purchases simply transfer the ownership of existing assets; such sales and purchases are not themselves (economic) investment and thus should not be counted as production of final goods and services. Used furniture was produced in some previous year; it NDP is GDP less depreciation -- the physical capital used up in producing this year's output.
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| 7-6 When gross investment exceeds depreciation net investment is positive and production capacity expands; the economy ends the year with more physical capital than it started with. When gross investment equals depreciation net investment is zero and production capacity is said to be static; the economy ends the year with the same amount of physical capital. When depreciation exceeds gross investment net investment is negative and production capacity declines; the economy ends the year with less physical capital. The first statement is wrong. Just because net investment was a minus $6 billion in 1933 does not mean the economy produced no new capital goods in that year. It simply means depreciation exceeded gross investment by $6 billion. So the economy ended the year with $6 billion less capital. The second statement is correct. If only one $20 spade is bought by a construction firm in the entire economy in a year and no other physical capital is bought then gross investment is $20 -- a positive amount. This is true even if net investment is highly negative because depreciation is well above $20. If not even this $20 spade had been bought then gross investment would have been zero. But gross investment can never be less than zero.
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| 7-8 (a) GDP = $388; NDP = $361; (b) NI = $339; (c) PI = $291; (d) DI = $265.
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| 7-11 Price index for 1984 = 62.5; 60 percent; real GDP for 1984 = $112 000 and real GDP for 1992 = $352 000.
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| 7-12 Values for real GDP top to bottom of the column: $2 206.5 (inflating); $2 695.1 (inflating); $3 133.8 (inflating); $3 905.6 (inflating); $5 864.8 (inflating); $6 739.7 (deflating). |
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