Deck 7: A: Measuring the Economys Output

Question 1

Differentiate between nominal and real GDP.

Answer 1

Nominal GDP is the actual measured GDP in terms of current year dollars or prices existing at the time the output was produced.Real GDP reflects the value of GDP after it has been corrected for price changes compared to the price level in a reference year (called the base year).A GDP price index is calculated each year to measure the level of prices relative to the level of prices in the base year.

Question 2

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

Answer 2

There are three basic reasons for the importance of national income accounting.First, it gives us a measure of the state of the economy at a particular point in time.Second, it permits us to track the condition of the economy over time to see whether it has changed.Third, it provides the basis for making economic policy decisions.

Question 3

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?

Answer 3

The value added by all firms is $7,600, or the final sales value.Firm A added $1,600, Firm B added $900, Firm C added $1,200, Firm D added $1,500, and Firm E added $2,400.The value added by all firms totals $7,600 (= $1,600 + 900 + 1,200 + 1,500 + 2,400) and equals the final sales value by Firm E.

Question 4

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

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

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 7

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

Question 8

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

Question 9

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

Question 10

Define the four categories of expenditures, which comprise GDP.

Question 11

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 12

Why is GDP a monetary measure?

Question 13

Define net exports.

Question 14

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

Question 15

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 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

How is a price index computed?

Question 18

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

Question 19

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 20

Define GDP and its characteristics.

Question 21

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

Question 22

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

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 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 25

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 26

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

Question 27

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 28

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

Question 29

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

Question 30

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