Deck 7: Part A: Measuring the Economys Output

Question 1

Give the three categories, which comprise gross investment; and explain the difference between them.

Answer 1

Gross investment includes (1) final purchases of machinery, equipment, and tools by businesses; (2) all construction including residential; (3) changes in business inventories.The first group restates the definition of investment goods; the second item is houses and buildings that can yield an income return; the third group is "unconsumed output" and is therefore part of investment.

Question 2

Why is GDP a monetary measure?

Answer 2

GDP is a monetary measure to make it possible to compare the relative worth of a diverse collection of goods and services over time.It is not possible to count the number of goods and compare them because the types of goods change over time.It is possible to count the number of goods and attach monetary values to them to reflect their relative worth and then compare the value of the output at different points in time.

Question 3

Explain what is and what is not included in government purchases in GDP.

Answer 3

Government purchases are government expenditures for goods and services the government consumes in producing public goods.These expenditures are for final goods and all direct purchases of resources such as labour.It also includes expenditures for social capital such as highways and buildings that have a long life.What are not included are government expenditures for transfer payments such as Employment Insurance benefits or welfare because these expenditures generate no production.

Question 4

What are the components of net domestic income at factor cost? What is the relative share of GDP in 2011 going to: Wages, salaries and supplementary labour income; and to Profits of corporations and government enterprises before taxes?

Question 5

The following table shows the price of a specific stereo receiver for a five-year period.Using year 3 as the base year, calculate the price index for each year.

Question 6

How is a price index computed?

Question 7

What is the definition of GDP? How would the value of output produced at a Canadian-owned factory in Canada and a foreign-owned factory in Canada be treated in GDP accounting?

Question 8

Of what use is national income accounting to economists and to policy makers?

Question 9

The following is a list of figures for a given year in billions of dollars.Using this data, compute: (a) GDP by the Expenditure Method; (b) GDP by the Income Method; (c) Net exports; and (d) Net Investment.

Question 10

Define the four categories of expenditures, which comprise GDP.

Question 11

What adjustments need to be made to go from net domestic income at factor cost to GDP?

Question 12

Explain the difference between final and intermediate goods, and give an example of each.

Question 13

Define GDP and its characteristics.

Question 14

Net investment can be positive, negative, or zero, but gross investment can never be less than zero.Explain.

Question 15

Differentiate between nominal and real GDP.

Question 16

Which of the following are included and which are excluded in calculating this year's GDP? Explain in each instance.(a) A monthly scholarship cheque 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) Canada Pension Plan cheques 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.

Question 17

Define net exports.

Question 18

The following is a list of figures for a given year in billions of dollars.Using this data, compute: (a) GDP by the Expenditure Method; (b) GDP by the Income Method; (c) Net exports; and (d) Net Investment.

Question 19

Firms A-E are involved in the production of some good.What is the total value added by all the firms in the production of this good? What did each firm add separately in value and what does it total?

Question 20

Why do economists worry about "multiple counting" and calculate only the "value added" in the production process?

Question 21

The following data show nominal GDP and the appropriate price index for several years.Compute real GDP for each year and indicate whether you have "inflated" or "deflated" nominal GDP in finding real GDP.All GDP are in billions.

Question 22

If Canada doubled its real GDP, it would be a much less liveable society than it is today.Explain this view.

Question 23

Discuss the pros and cons of GDP as a measure of the economy's output performance and as a measure of its standard of living.

Question 24

The following table shows the price of a specific stereo receiver for a five-year period.Using Year 3 as the base year, calculate the price index for each year.

Question 25

Identify at least four transactions and other variables, which are not included in the GDP.

Question 26

What are the two basic ways of deriving real GDP from nominal GDP?

Question 27

The next four questions refer to the following price and output data over a five-year period for an economy that produces only one good.Assume that year 2 is the base year. (a) If year 2 is the base year, give the price index for year 3.(b) Give the nominal GDP for year 4.(c) What is the real GDP for year 4?
(d) Tell which years you would deflate nominal GDP and which years you would inflate nominal GDP in finding real GDP.

Question 28

What is the relationship between real GDP, nominal GDP, and the price index?

Question 29

The expanding "underground" economy creates problems for economic policy makers.Explain.

Question 30

When would a fixed based price index cause GDP growth to be overstated?