SECTION A
1. It is conventional to divide the nation's total production into four categories. Name and
explain the four categories.
Answer: Land- any natural resources that comes from land that used in the production or process of
creating final goods or services. E.g.: water, natural gas, wood, oil, copper
Labour- Labour which is the physical effort put out by people to create the goods and services that
are sold.
Capital- the resources that contribute to the processing of finished goods and services.
Entrepreneurship- Entrepreneurship is the secret sauce that combines all the other factors of
production into a product or service for the consumer market.
2. What are the payments each factor of production receives?
Ans: Land- Rent, Labour-wages, Capital- Interest, Entrepreneurship- Profit
3. Explain the differences between "human capital," "financial capital," and "capital."
Ans: Financial capital is how companies invest in their businesses. They use capital to buy more
equipment, buildings, or materials, which they then use to make goods or provide services.
Human capital is the economic value of the abilities and qualities of labor that influence productivity,
such as education.
Capital- Capital refers to the assets and money companies require to fund their standard
operations and generate revenue.
4. What is a market? Must a market have a single physical location?
Ans: A market where is a transaction occurs between a seller and buyer for the exchange of goods
and services. Also, a market doesn’t have to have a single physical location.
5. How are the roles of the household different in the goods market and in the factor markets?
Ans: They provided the labour to businesses and in return they received wages in which they used to
purchase goods and services from the goods market (companies).
Measuring GDP
6. Define and discuss GDP.
Ans: Gross Domestic Product measures the value of final goods and services produced in a specific
country during a specific period. This specifically entails the goods and services that are bought by
the final user.
7. Critically evaluate the following statement. “GDP is a proxy for the standard of living but not
a direct measure.”

Ans: GDP is an indicator of a society’s standard of living, but it is only a rough indicator
because it does not directly account for leisure, environmental quality, levels of health and
education, activities conducted outside the market, changes in inequality of income,
increases in variety, increases in technology, or the positive or negative value that society
may place on certain types of output. The standard of living is all elements that affect
people’s happiness, whether these elements are bought and sold in the market or not.
8. Using the above figures, compute the subtotals for each of the four major spending
categories and label them. Then compute the value of GDP
Ans:
Personal expenditure
Durable goods
Nondurable goods
Services
TOTAL
$
Business Investment
Nonresidental investment
Residental investment
Change in business inventories
TOTAL
$
Government Spending
Federal consumption spending
State consumption spending
TOTAL
Net Import and Export
Exports
Imports
GDP
659.3
1592
3234.5
5485.8
846.9
327.2
68.4
1242.5
523.8
928.9
1452.7
957.1
1058.1
2015.2
8080
9. Using the above data calculate GDP using the income approach and identify which two items
on the list are superfluous in your calculation
Compensation to Employees
Proprietors Income
Corporate profits
Net Interest
Rental income
+Depreciation
900
+Indirect taxes minus
subsidides
500
+Net factor payments ROW 50
TOTAL
4500
500
800
400
100
7750
billon
Government spending and Consumption these are expenditures and will be included in expenditure
approach
Answer Parts (a) through (g) using the information in Table 6.4 describing the Macrovian economy.
Quantities are given in millions of Macrovian dollars (M$).
a) Calculate gross private investment.
Gross private investment= Gross private domestic investment+ Residential construction+ Inventory
management= 586+453+ (-30)=1008.9
Ans:
ement
investment
(a)eGross
+ investment
private
= Business
in
plant and
Business
and
Gross
private
investment
in plant
=
(b) Calculate Macrovian GDP.
Ans: Y= C+I+G+ (EX-IM)= 3514+ (586+453-30)+1589+ (380-285)=6208 (MILLIONS IN MACORVAIN)
(c) Calculate gross national product (GNP).
ANS: GNP= GDP- Net factor payments to the rest of the world
6208-(-17)=6,226
(d)
Calculate net national product (NNP).
Ans: NNP= GNP- Depreciation= 6,226 – 643= 5,582
(e) Calculate national income.
Ans: National income= GNP- (Depreciation + Indirect business taxes minus subsidies)= 6,226(643+489)= 5093
(f) Calculate personal income.
Ans: Personal income= National income+ Government transfer payments and interest- (Payroll taxes+
Corporate taxes+ Corporate profit- Dividends)= 5093+ 337- (441+215+45)= 4726
g. Calculate disposable personal income.
Ans: Disposable personal income= Personal income – Personal taxes=4,726-600= 4,126
10. What is the difference between real and nominal GDP and why do economists make this
distinction?
Nominal GDP measures gross domestic product in current dollars. Real GDP measures gross
domestic product by adjusting Nominal GDP for price changes.
SECTION B
1. Explain the difference between consumption and capital goods.
Ans: A capital good is any good used for production. Consumer goods are those used by
consumers and have no future productive use.
2. Identify the four factors of production, and tell what type of income is earned by each factor.
Ans: Ans: Land- Rent, Labour-wages, Capital- Interest, Entrepreneurship- Profit
3. Explain the structure of the circular flow model.
Ans: The circular flow model demonstrates how money moves from producers to households and
back again in an endless loop. In an economy, money moves from producers to workers as wages and
then back from workers to producers as workers spend money on products and services.
4. Describe the circular flow of the economy by discussing the two markets where households
and firms meet.
Ans: Households are buyers in the market for goods and services. Households exchange income for
goods and services. Businesses are sellers in the market for goods and services.
5. Draw a circular flow diagram with households and firms and with government. Label the markets
and the flows in the circular flow diagram.
6) Define and distinguish between final goods and intermediate goods
Final goods are referred to as those goods which do not require further processing. These
goods are also known as consumer goods and are produced for the purpose of direct
consumption by the end consumer. Intermediate goods are referred to as those goods that
are used by businesses in producing goods or services.
7. Explain carefully the difference between GDP and GNP.
Gross domestic product (GDP) is the value of the finished domestic goods and services
produced within a nation's borders. On the other hand, gross national product (GNP) is the
value of all finished goods and services owned by a country's citizens, whether or not those
goods are produced in that country
a) GNP = GDP + NFIA ( Factor pay from ROW — Factor pay to ROW) = 8000
+(250—300)= $ 7950 billions.
( The distinction between homegrown pay and public pay is of NFIA)
b) National Income ( NI)= GNP — Depreciation — NIT(indirect charge short
endowments) = 7950—900—500 =$6550 billions.
( National pay is assessed at factor cost which we can get from market value less
NIT )
c) Personal pay ( PI)= NI — corporate duty — held procuring — social protection +
move installments + net revenue
= 6550 — 500 ( both corporate assessment and held income together) —
700+1100+300 = $6750 billions.
(Corporate duty + held income = corporate benefit short profit )
d) Disposable individual pay ( DPI) = Personal pay—personal taxes = 6750—1000=$
5750 billions.
e) NNP= GNP-Depreciation- 7950 – 900= 7050
a. What was the value of net exports of goods and services in 1999?
Ans: a) net exports = exports - imports = 998 - 1,252 = -254
b. What was (nominal) GDP equal to in 1999?
Ans: GDP = C + I + G + NX = 6,258 + 1,623 + 1,630 +- 254 = 9,257
c. What was the (nominal) value of total production equal to in 1999?
Ans: total production = C + I + G + X = 6,258 + 1,623 + 1,630 + 998 = 10,509
11. Is it possible for nominal GDP to increase while real GDP does not change?
Ans: The bottom line is that the difference between nominal GDP and real GDP is that nominal GDP
is not adjusted for inflation. You can see a rise in nominal GDP, but it could be simply because the
prices are rising, not because more goods and services are produced.