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GDP Inclusions and Exclusions: Understanding Economic Well-Being - Prof. Mark L. Healy, Study notes of Introduction to Macroeconomics

Harper CollegeIntroduction to Macroeconomics
Prof. Mark L. Healy

Which economic transactions are included and excluded when calculating gross domestic product (gdp), and how these inclusions and exclusions impact the accuracy of gdp as a measure of economic well-being. The document also includes a case study comparing the gdp and economic well-being of switzerland and india.

Typology: Study notes

Pre 2010

Uploaded on 07/31/2009

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Chapter 6 REVIEW
1. Which of the following are included and which are excluded in calculating this year’s GDP?
(a) A monthly scholarship check received by an economics student
[included or excluded? (circle one)]
(b) The purchase of a new truck by a trucking company
[included or excluded? (circle one)]
(c) Government purchase of missiles from a private business
[included or excluded? (circle one)]
(d) The purchase of a used tractor by a farmer
[included or excluded? (circle one)]
(e) The value of the purchase of shares of Microsoft by an individual
[included or excluded? (circle one)]
(f) Social Security checks received by a retired person
[included or excluded? (circle one)]
(g) An increase in business inventories
[included or excluded? (circle one)]
(h) The income of a tax accountant working for a business
[included or excluded? (circle one)]
(i) Income received from interest on a corporate bond
[included or excluded? (circle one)]
(j) The cashing in of a U.S. savings bond
[included or excluded? (circle one)]
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Partial preview of the text

Download GDP Inclusions and Exclusions: Understanding Economic Well-Being - Prof. Mark L. Healy and more Study notes Introduction to Macroeconomics in PDF only on Docsity!

Chapter 6 REVIEW

1. Which of the following are included and which are excluded in calculating this year’s GDP? (a) A monthly scholarship check received by an economics student [included or excluded? (circle one)] (b) The purchase of a new truck by a trucking company [included or excluded? (circle one)] (c) Government purchase of missiles from a private business [included or excluded? (circle one)] (d) The purchase of a used tractor by a farmer [included or excluded? (circle one)] (e) The value of the purchase of shares of Microsoft by an individual [included or excluded? (circle one)] (f) Social Security checks received by a retired person [included or excluded? (circle one)] (g) An increase in business inventories [included or excluded? (circle one)] (h) The income of a tax accountant working for a business [included or excluded? (circle one)] (i) Income received from interest on a corporate bond [included or excluded? (circle one)] (j) The cashing in of a U.S. savings bond [included or excluded? (circle one)]

2. GDP is often used as a measure of Economic Well-Being in a country, but there are problems. For each problem below state whether actual GDP figures UNDERSTATE or OVERSTATE actual economic well-being. “Understate” means that the GDP figures are too low compatred to society’s acutual economic well-being. “Overstate” means the **the GDP figures are too large compared to society’s actual well-bing.that

  1. non-market transactions are not included in GDP** Therefore does GDP UNDERSTATE or OVERSTATE society’s actual economic well-being? 2. leisure increases the standard of living but it isn't counted Therefore does GDP UNDERSTATE or OVERSTATE society’s actual economic well-being? 3. improved product quality often isn't accounted for in GDP Therefore does GDP UNDERSTATE or OVERSTATE society’s actual economic well-being? 4. GDP does not account for the composition of output Therefore does GDP UNDERSTATE or OVERSTATE society’s actual economic well-being? 5.GDP does not account for the distribution of output Therefore does GDP UNDERSTATE or OVERSTATE society’s actual economic well-being? 6. increases in GDP may harm the environment Therefore does GDP UNDERSTATE or OVERSTATE society’s actual economic well-being? 7. the underground economy produces goods and services but they are not included in GDP Therefore does GDP UNDERSTATE or OVERSTATE society’s actual economic well-being? 8. GDP does not account for a possible future decline in output due to resource depletion. Therefore does GDP UNDERSTATE or OVERSTATE society’s actual economic well-being? 9. Noneconomic Sources of Well-Being like courtesy, crime reduction, etc., are not covered in GDP. Therefore does GDP UNDERSTATE or OVERSTATE society’s actual economic well-being? 10. We must use per capita GDP to compare the living standards of different countries. Therefore does GDP UNDERSTATE or OVERSTATE society’s actual economic well-being?

5. The following data show nominal GDP and the appropriate price index for several years. Compute real GDP for each year. In which year(s) was there a recession (decline in real GDP)? (All GDP figures are in billions.) Nominal Price level Year GDP index Real GDP 1 $117 120 ________ 2 124 104 ________ 3 143 85 ________ 4 149 96 ________ 5 178 112 ________ 6 220 143 ________

ANSWERS:

1. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in each instance. (a) A monthly scholarship check received by an economics student (b) The purchase of a new truck by a trucking company (c) Government purchase of missiles from a private business (d) The purchase of a used tractor by a farmer (e) The value of the purchase of shares of Microsoft by an individual (f) Social Security checks received by a retired person (g) An increase in business inventories (h) The income of a tax accountant working for a business (i) Income received from interest on a corporate bond (j) The cashing in of a U.S. savings bond (a) Scholarships are not included in GDP. They are viewed as financial transactions and would be either a public or private transfer payment depending on the source of funds. They are awards for past performance and would not be included in current production. They don’t represent income earned by providing a productive resource as defined in the GDP accounts. [text: E p. 107; MA p. 107] (b) The truck is included because it represents investment. It is a final good that was produced in the current year. [text: E pp. 108-109; MA pp. 108-109] (c)The missile purchase is included as part of government spending on goods and services. [text: E pp. 109-110; MA pp. 109-110] (d) The used tractor is not included because it was counted when it was new. [text: E p. 107; MA p. 107] (e)The value of a stock purchase is not included because it is just a swap of paper assets. [text: E pp. 106-109; MA pp. 106-109] (f) A Social Security payment is not included because it is a transfer payment, not payment for current productive services. [text: E p. 107; MA p. 107] (g) An increase in business inventories is included as part of business investment. [text: E p. 109; MA p. 109] (h) The accountant’s income is included because it is payment for productive services (accounting). [text: E p. 111; MA p. 111] (i) The income from a corporate bond is included because it is payment for use of capital resources during that year. [text: E p. 112; MA p. 112] (j) Cashing a savings bond is not included because it represents a financial transaction only. [text: E p. 107; MA p. 107]

GDP per capita: $32,700 (2003 est.) India: GDP: 1,065,070,607 (July 2004 est.) Population: $3.033 trillion (2003 est.) GDP per capita = GDP/population GDP per capita: $2,900 (2003 est.)

4. (Key Question 6-8) a. Using the above data, determine GDP and NDP by the expenditure method. GDP = $ GDP = C + Igross + G + Xnet Igross = Inet + depreciation = 33 + 27 = 60 GDP = 245 + 60 + 72 + 11 = 388 NDP = $ NDP + C + Inet + G + Xnet NDP = 245 + 33 + 72 + 11 = 361 or NDP = GDP - depreciation NDP = 388 - 27 = 361 b. calculate National Income (NI) by the income method. NI = $ NI = wages + rents + interest + profits profits = corporate profits + proprietor's income profits = 56 + 33 = 89 NI = 223 + 14 + 13 + 89 = 339 5. Compute real GDP for each year. Nominal Price level Year GDP index Real GDP 1 $117 120 $ 98 2 124 104 119 3 143 85 168 4 149 96 155 5 178 112 159 6 220 143 154