University of Lethbridge - Department of Economics
ECON 1012 – Introduction to Macroeconomics
Instructor: Michael G. Lanyi
Chapter 6 –– National Income Accounting
Answer Key
1. D
Response:
National income accounting provides a means for combining subaggregates into a single
aggregate measure of production and consumption that can then be used to gauge total economic
activity.
2. D
Response:
See the definition of GDP in the text.
3. A
Response:
Because GDP measures the market value of the final output produced within a country's borders
and GNI measures the market value of the final output produced by a country's citizens, the
income earned abroad by domestic factor sources must be added to GDP and the income earned
domestically by foreign factor sources must be subtracted from GDP in order to move from
GDP to GNI.
4. C
Response:
Since Opel does not operate in the U.S., its income does not increase U.S. GDP.
5. D
Response:
See the definitions of flow and stock in the text.
6. C
Response:
GDP includes only goods sold to consumers. Sales to other firms are intermediate goods and
pension benefits do not reflect production.
7. B
Response:
Summing final sales is one way to avoid double counting since the value of intermediate goods
is excluded when summing final sales.
8. A
Response:
Subtract the cost of production ($4000) from final sales ($5000) to find the contribution of the
services by the dealer to GDP ($1000).
9. A
Response:
GDP is the sum of the value added by the three firms, which equals 500 + 1400 + 875, or 2775.
10. C
Response:
The commission that the dealer receives is a part of GDP because that is the value added as a
result of an economic activity. The others are nonmarket activities or transfers of financial assets
and are not counted in GDP.
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11. C
Response:
The sum of consumption (C), investment (I), government expenditure(G), and net exports
(X-IM) equals total expenditure or GDP.
12. C
Response:
Transfer payments are spent and included in consumption or saved and channeled to investment.
13. B
Response:
Net exports, or the difference between exports and imports, are added to the sum of
consumption, investment, and government purchases when computing total expenditure or GDP.
If net exports are negative, then Canadian GDP must be less than the sum of consumption,
investment, and government purchases.
14. A
Response:
GDP equals C + I + G + (X - IM) =3600+800+1000+650-450.
15. D
Response:
Net exports equal exports minus imports.
16. B
Response:
GNI equals C + I + G + (X - IM) plus net foreign factor income =3600+800+1000+650-450 +
(-30)
17. C
Response:
NDP = GDP - depreciation, which equals $6.2 trillion in this case.
18. D
Response:
See the definition of net private investment in the text.
19. C
Response:
See the definition of NDP in the text.
20. B
Response:
National income is the sum of employee compensation, interest, rent, and profits.
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21. A
Response:
See the definition of disposable personal income in the text.
22. D
Response:
According to the income approach, national income equals the sum of profits, rent, interest and
employee compensation.
23. A
Response:
To adjust nominal output for inflation create a price index and divide nominal GDP by that price
index.
24. B
Response:
If nominal GDP increased but real GDP fell, the price level must have increased fast enough to
offset the drop in output.
25. B
Response:
The presence and extent of non-market activities complicates international comparisons of
living standards because the value of these activities is not reflected in GDP. Price differences
also complicate such comparisons because these differences imply that the value of output may
differ across countries even when the quantity of output is the same.
26. B
Response:
Since the entire increase in nominal GDP resulted from rising prices, real GDP (which controls
for inflation) did not change.
27. C
Response:
Since output rose by 33 percent but nominal GDP increased by only 25 percent, the price level
must have increased by less than 25 percent.
28. A
Response:
A number of arbitrary decisions are made regarding the allocation of expenditures among
subaggregates. Some expenditures that are really current consumption are counted as
investment.
29. B
Response:
Real GDP is the ratio of nominal GDP to the price index (i.e. $4.2 trillion/1.40 or $3 trillion.)
30. A
Response:
Real GDP is the ratio of nominal GDP to the price index: 8.760/1.029 = 8.51.
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31. A
Response:
Net foreign factor income is the difference between the foreign income of one's citizens and the
income of residents who are not citizens. If more foreign money is invested in Ireland than Irish
citizens have invested abroad, it is likely that the income of Irish residents who are not citizens
will exceed the foreign income of Irish citizens. That is net foreign factor income will be
negative and GDP will exceed GNI in Ireland.
32. A
Response:
Net foreign factor income is the difference between the foreign income of citizens and the
income of residents who are not citizens. If Saudi Arabia has invested more money in foreign
countries than foreigners have invested in Saudi Arabia, it is likely that the foreign income of
Saudi citizens will exceed income of Saudi residents who are not citizens. This implies that net
foreign factor income will be positive, so GNI will exceed GDP in Saudi Arabia.
33. A
Response:
Intermediate products are products used as inputs in the production of some other product.
34. B
Response:
Including the value of intermediate goods (i.e. goods used to produce other goods) in GDP leads
to double counting since the value of these goods is also reflected in the value of the final goods
and services they are used to produce.
35. D
Response:
The value of output always equals income because income is earned only through the
production of output.
36. B
Response:
The sum of these four components equals total expenditure.
37. D
Response:
GDP = Consumption + Investment + Government purchases + Exports - Imports. Rewritten, Net
exports = GDP - Consumption - Investment - Government purchases.
38. A
Response:
Personal consumption expenditures consist of household and individual purchases of services
and durable and nondurable goods. Police protection is part of government expenditures.
39. B
Response:
Transfer payments do not enter the national income accounts because they represent income
transfers from the government to its citizens, not expenditures. Government expenditures do
enter the national income accounts because they represent government purchases of goods and
services.
40. D
Response:
Depreciation is gross investment minus net investment ($1580-$513).
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41. D
Response:
According to the text, NDP = GDP - depreciation
42. D
Response:
PI = NI + transfer payments - corporate retained earnings - corporate income taxes employment taxes. GNI = GDP + Net foreign factor income = 550 + 200 + 190 + 30- 20 + 3=
953. NI = GNI - depreciation - indirect business taxes = 953 – 65 – 44 = 844. PI = 844 + 70 – 49
– 69 – 37 = 759.
43. D
Response:
Disposable personal income = PI - personal income taxes. PI = NI + transfer payments undistributed corporate profits - corporate income taxes - employment taxes. NI = GNI depreciation - indirect business taxes. GNI =550+200+190+30-20+3= 953. NI = GNI depreciation - indirect business taxes = 953-65-44=844. PI = 844+70-49-69-37=759. PDI =
759-92=667.
44. C
Response:
See the definitions of real and nominal GDP in the text.
45. A
Response:
Nominal output is GDP calculated at existing prices. Comparisons over time can be misleading
because changes in nominal output are produced by changes in both real output and the price
level.
46. C
Response:
Since real income increases by 6 percent and the price level increases by 10 percent, it follows
that nominal income rises by the sum of the two since it incorporates both changes in output and
the price level.
47. A
Response:
From the expenditure equation, we know that GDP = C + I + G + NX. From this it follows that
C + I = GDP - G - NX, or $4.1 trillion.
48. C
Response:
GNI = GDP + Net foreign factor income.
49. A
Response:
GDP = Consumption + Investment + Government Purchases + Exports - Imports.
50. A
Response:
Net exports = Exports - Imports.
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51. D
Response:
GDP = Consumption + Investment + Government purchases + Exports - Imports. Rewritten, Net
exports = GDP - Consumption - Investment - Government purchases.
52. C
Response:
GDP measures market activity and excludes nonmarket activity.
53. C
Response:
Since Greece has the reportedly largest relative underground economy, official statistics
underestimate Greek production the most.
54. C
Response:
See the definition of disposable personal income in the text.
55. D
Response:
In poor countries there are many non-market activities that are not taken into account accurately
while calculating GDP which measures market transactions only. The relative prices of the
products and services consumers buy often differ substantially across countries as well.
56. C
Response:
Economic activity is only one determinant of economic welfare. The impact of any change in
economic activity depends not only on the change in activity itself but also on how this change
affects the other determinants of economic welfare.
57. D
Response:
See Table 6-3.
58. A
Response:
See the definition of rent in the text.
59. D
Response:
See the definition of interest in the text.
60. B
Response:
See the definition of profits in the text.
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