Activity 10 gdp and its cousins answer key

ACTIVITY 16 GDP and Its Cousins Part A. Use the following information on the national income accounts to answer the problems.

Main Points

• Gross Domestic Product (GDP) is the total market value of all final goods and services produced during a particular time period in the United States.

GDP includes profits earned by foreign-owned businesses and income earned by foreigners in the United States, but it excludes profits earned by U.S.-owned companies overseas and by U.S. residents working abroad.

• Gross National Product (GNP) is the total market value of all final goods and services produced during a particular time period by U.S. residents.

GNP includes profits earned by U.S.-owned companies overseas and income earned by U.S. residents working abroad, but it does not include income earned by foreign- owned companies in the United States or foreigners working in this country.

GDP and GNP figures are now officially obtained by using the following calculations.

Gross Domestic Product plus: receipts of factor income from the rest of the world minus: payments of factor income to the rest of the world

Equals: Gross National Product.

In this Activity, this is shortened to:

Gross Domestic Product plus: net receipts of factor income from the rest of the world

Equals: Gross National Product.

and

Gross National Product minus: net receipts of factor income from the rest of the world

Equals: Gross Domestic Product.

• Net National Product (NNP) is the Gross National Product (GNP) minus the Consumption of Fixed Capital, or Depreciation (D). Thus NNP = GNP – D or GNP = NNP + D, and Net Private Domestic Investment is Gross Private Domestic Investment minus Depreciation.

• GDP and GNP do not include: a. purchases of intermediate goods. b. buying and selling second-hand goods

(except for the commission, if any, earned). c. buying and selling stocks or bonds

(except for the commission, if any, earned). d. money transfers (e.g., unemployment compensation, social

security payments, and certain interest payments by the federal government and persons).

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• If a firm buys intermediate goods (raw materials) and then, after processing, sells them as final goods, only the value added is counted in GDP and GNP.

• GDP can be measured in two ways: a. by the money spent to buy our output of goods and services, called the

Flow of Product, or Expenditures, method. That is GDP = C + I + G + (X – M). “C” stands for consumer expenditures on goods and services. “I” stands for Gross Private Domestic Investment and includes all new con- struction of business structures and residences, purchases of new machinery, and changes in inventory. “G” stands for government pur- chases of goods and services (excluding transfer payments). “X” stands for Exports, and “M” stands for Imports.

b. by the money earned in the process of producing final goods and ser- vices, called the Earnings and Cost, or Incomes, approach. That is, GDP = National Income (NI) + Indirect Business Taxes + Capital Consumption (Depreciation) – Net Receipts of Factor Income from the Rest of the World.

• National Income (NI) is an estimate of the factor cost of production, and it measures the flow of income accruing to the labor and property resources used in producing current output. It is equal to Compensation of Employees + Proprietors’ Income (adjusted for Inventory Valuation and Capital Consumption) + Rental Income of Persons (adjusted for Capital Consumption) + Net Interest (which excludes some federal government and personal interest payments that are considered transfer payments) + Corporate Profits (adjusted for inventory valuation and capital consump- tion). Corporate Profits, in turn, consist of corporate income tax payments, dividends, and undistributed corporate profits. Another way to get National Income is to subtract Indirect Business Taxes (including some statistical adjustments) from NNP. NI = NNP – I.

• Personal Income (PI) differs from National Income for two main reasons: (1) some of the payments included in National Income do not reach people as Personal Income; and (2) income transfer people receive as payments are not payments for contributions to current production. Personal Income is National Income minus corporate income taxes, undistributed corporate profits, and Social Security taxes plus transfer payments and interest paid by persons.

• Disposable Personal Income (DPI) is the income that people have to spend or save after Personal Taxes are subtracted from Personal Income. Thus, Disposable Personal Income is Personal Income – Personal Income Taxes.

• Personal Savings is Disposable Personal Income – Personal Outlays.

• Personal Outlays are equal to Consumer Expenditures on goods and services + Interest Paid by Persons.

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ACTIVITY 16 continued

Part B. Compute the answers to the problems that follow.

1. You are given the following simplified and rounded data for a hypothetical economy.

Billions of $ Personal Consumption Expenditures (C) 928 Gross Private Domestic Investment Expenditures for Structures,

Equipment, and Inventory Change (I) 246 Government Purchases of Goods and Services (G) 288 Net Exports (Exports – Imports or X – M) –3 Net Receipts of Factor Income from the Rest of the World 15 Consumption of Fixed Capital (depreciation) 140 Indirect Business Taxes (including statistical adjustments) 135

Compute the following:

a. Gross Domestic Product $_______________ billion b. Gross National Product $_______________ billion c. Net National Product $_______________ billion d. National Income $_______________ billion

2. You are now given additional simplified and rounded data for this economy.

Billions of $ Compensation of Employees (mostly wages and salaries, includes

employer and employee Social Security taxes) 891 Proprietors’ Income (adjusted) 115 Rental Income of Persons (adjusted) 16 Net Interest (does not include federal government interest

payments, which are counted as transfer payments, or interest paid by persons) 72

Total Corporate Profits (before taxes) (adjusted) 105 Corporate Income Taxes 52 Dividends 30 Social Security Taxes 111 Government and Private Transfer Payments 168 Interest Paid by Persons 25 Personal Income Taxes 159

Compute the following:

a. National Income $_______________ billion b. Personal Income $_______________ billion c. Disposable Personal Income $_______________ billion d. Personal Savings $_______________ billion

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ACTIVITY 16 continued

Part C. Answer the following questions. Use the Worksheet for Activity 10 on the following page.

1. Why can’t one add up the value of sales for all producing units to arrive at national product? What must one add up instead?

2. Explain the relationships among GDP, GNP, NNP, NI, PI, and DPI. For what differ- ent purposes might one be interested in each of these different totals?

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ACTIVITY 16 continued

WORKSHEET FOR ACTIVITY 16

GDP, GNP, NNP, and National Income (NI) can be obtained in two ways:

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Flow of Product, “Money Spent” Consumption Expenditures (C) _____ Gross Private Domestic Investment (I) _____ Government Purchases of

Goods & Services (G) _____ Net Exports (X–M) _____

Gross Domestic Product (GDP) _____ + Net Receipts of Factor Income From

the Rest of the World. _____

Gross National Product(GNP) _____ – Capital Consumption _____

Net National Product (NNP) _____ – Indirect Business Taxes _____

National Income (NI) _____

Earnings and Cost, “Money Received” Compensation of Employees _____ Proprietors’ Income (Adjusted) _____ Rental Income of Persons (Adjusted) _____ Net Interest _____ Corporate Income Taxes _____ Dividends _____ Undistributed Corporate Profits _____

National Income (NI) _____ + Indirect Business Taxes _____

Net National Product (NNP) _____ + Capital Consumption _____

Gross National Product (GNP) _____ – Net Receipts of Factor Income From

the Rest of the World. _____

Gross Domestic Product (GDP) _____

Personal Income (PI) can also be obtained in two ways:

TEAR DOWN National Income _____ – Corporate Income Taxes _____ – Undistributed Corporate Profits _____ – Social Security Taxes _____ _____

_____ + Government & Private Transfer

Payments (_____) & Interest Paid by Persons (_____) _____

Personal Income _____

BUILD UP PI = Compensation of Employees _____ Proprietors’ Income (Adj.) _____ Rental Income of Persons (Adj.) _____ Net Interest _____ Dividends _____ Government & Private Transfer

Payments (_____) & Interest Paid by Persons (_____) _____

_____ – Social Security Taxes _____

Personal Income _____

Personal Income _____ – Personal Income Taxes _____

Disposable Personal Income _____ – Consumption Expenditures _____ – Interest Paid by Persons _____ _____

Personal Savings (Sp) _____

Once we have Personal Income, obtaining Disposable Personal Income (DPI) and Personal Savings (Sp) is easy:

Total Corporate Profits (Adj.)}

Personal Outlays {