Chapter 7

Welfare payments to low-income families are included in national income.

FALSE

Real GDP accounts for changes in product quality; nominal GDP does not.

False

NDP =

GDP less consumption of fixed capital (Depreciation)

National income (NI) =

NDP less the statistical discrepancy, plus the net foreign factor income. includes all income received, regardless of whether it is earned or unearned. Finally, disposable income is PI less personal taxes.

Disposable Income (DI) =

PI less personal taxes.

What is the source of data for the consumption component of the U.S. GDP?

The Census Bureau's Retail Trade Survey.

Which of the following activities is excluded from GDP, causing GDP to understate a nation's well-being?

The child-care services provided by stay-at-home parents.

National income accountants define investment to include: Multiple Choice a. any increase in business inventories. b. the addition of cash to a savings account. c. the purchase of any durable good, for example, an automobile or a refrigerator. d. the purchase of common or preferred stock.

a. any increase in business inventories.

(Consider This) When making a capital stock and reservoir analogy, the: a. inflow from the river is gross investment. b. level of water in the reservoir is depreciation. c. outflow below the dam is the stock of capital. d. level of water in the reservoir is net investment.

a. inflow from the river is gross investment

National income accountants define investment to include:

any increase in business inventories.

In national income accounting, the consumption category of expenditures includes purchases of:

consumer durable goods, consumer nondurable goods, and services.

Expenditures Approach

consumption by households + investment by businesses + government purchases + expenditures by foreigners

Corporate profits =

corporate income taxes + dividends + undistributed corporate profits.

If depreciation exceeds gross investment:

the economy's stock of capital is shrinking.

A large underground economy results in an:

understated GDP.

Income Approach

wages + rents + interest + profits + statistical adjustments

When does an economy enlarge its stock of capital goods:

when gross investment exceeds replacement investment.

Suppose that GDP was $200 billion in year 1 and that all other components of expenditures remained the same in year 2 except that business inventories increased by $10 billion. GDP in year 2 is:

$210 billion.

Real GDP

(Nominal GDP/Price Index) x 100

price index =

(Price of Market Basket In Specific Year/Price of Same Basket In Base Year) x 100

(Last Word) The U.S. government agency responsible for compiling the national income accounts is the:

Commerce Department's Bureau of Economic Analysis (BEA).

Refer to the information. Positive net investment is occurring in: Economy A: gross investment equals depreciation Economy B: depreciation exceeds gross investment Economy C: gross investment exceeds depreciation

economy C only.

What's an Intermediate good?

goods either purchased for resale or for further processing into final goods

Personal income (PI) =

includes all income received, regardless of whether it is earned or unearned