CHAPTER 23 (7)
Questions for Thought and Review
2.
If you add up all transactions, you will include intermediate goods—so the amount will far exceed both
GDP and GNP, which are measures of final output of an economy.
4.
The aggregate value added at each stage of production is, by definition, precisely equal to the value of final
sales. Thus, the value-added rate should also be 15 percent. (Technical note: This is assuming the valueadded tax is an income-based rather than consumption-based.)
6.
NDP is actually preferable to GDP as the expression of a country’s domestic output because NDP takes
depreciation into account. Depreciation is a cost of producing goods. However, measuring true depreciation
is difficult because asset values fluctuate, and so GDP rather than NDP is generally used in discussions of
economic activity.
8.
Transfer payments are not included in national income, so nothing directly would happen to it.
10. The difference between domestic personal income and national personal income is the addition of net
foreign factor income to domestic personal income.
Problems and Exercises
2.
a.
b.
c.
d.
e.
f.
GDP should fall as nonmarket transactions increase. An example is a person who cleans his partner’s
house for a fee cannot receive that fee as a married partner.
GDP would not change.
GDP would rise by the broker’s commission.
GDP would not change.
GDP would not change.
GDP would rise.
4.
GDP = C + I + G + (X2M) = 500 + 185 + 195 + 4 = 884.
GNP = GDP + Net foreign factor income = 884 + 2 = 886.
NDP = GDP2Depreciation = 884259 = 825.
NI = GNP2Depreciation = 886259 = 827.
PI = NI + Transfers from government + Non-business interest income - Corporate retained earnings - Social
Security taxes = 780 + 72 + 10 251247235 = 619.
DPI = PI2Personal taxes = 702291 = 611.
6.
a.
b.
c.
GDP = C + I + G + (X2 M) = 485.
GNP = GDP + Net foreign factor income = 488.
NI = Compensation + Rent + Profits + Net interest = 475.
NNP = NI = 475.
NNP = NDP + Net foreign factor income: NDP = 472.
Depreciation = GDP - NDP = 13.
GDP = C + I + G + (X2M) = 480.
GNP = GDP + Net foreign factor income = 483.
NI = Compensation + Rent + Profits + Net interest = 486.
NNP = NI = 486.
NNP = NDP + Net foreign factor income: NDP = 483.
Depreciation = GDP2NDP = 23.
Web Questions
2.
a.
The economic contributions of household and volunteer work.
b.
c.
Crime, depletion of nonrenewable resources, family breakdown and loss of leisure time. The depletion
of nonrenewable resources is the largest of these categories.
The GDP has been rising faster than has the GPI in recent years.