3.2.2: Income Approach

In calculating real GDP, income and expenditures are equal Select one: a. only if households spend all their income by purchasing all the goods and services produced within the year. b. only if households spend all their income and do not save. c. only if firms pay out all their earnings for wages and other factors of production. d. even if households do not spend all their income or firms do not pay out all their earnings.

d. If households save part of their income, the saved portion is "spent" in the factors of production market as investment capital for firms to borrow. Firms' profits are also "spent" in the factors of production market as payments to the owners. The correct answer is: even if households do not spend all their income or firms do not pay out all their earnings.

Proprietors' income is a component of which approach to calculating GDP? Select one: a. The expenditures approach b. The income approach c. The leakages approach d. The injections approach

b. The income approach adds up the income of all factors of production in the economy. Proprietors' income is the income that business owners pay to themselves.

The income approach includes employees' salaries and wages, corporate profits, interest paid to businesses, business owners' incomes, rental income, net payments to factors of production in the rest of the world, and depreciation. Select one: True False

True Each of the items in the problem is counted as income in the national accounts. You can calculate GDP by adding these items together with some adjustments for indirect taxes and subsidies.

Which of the following is not a component of national income? Select one: a. Employee compensation b. Transfer payments c. Rent for land d. Corporate profits

Because transfer payments are not compensation for a good or service, they are subtracted from national income.

National income is the total amount of money received in a country by the factors of production. Select one: True False

True

Net domestic product equals Select one: a. gross domestic product minus depreciated capital. b. personal income minus personal income taxes. c. the sum of national income, indirect business taxes, depreciation, and net foreign factor income. d. national income minus transfer payments.

a. Gross domestic product minus depreciated capital equals net domestic product. This equation tells us the total output after depreciation.

Transfer payments Select one: a. are not included in GDP because they do not represent current production of goods and services. b. are included in GDP because they are individuals' incomes. c. are not included in GDP unless they are Social Security payments. d. are included in GDP because they will be used for consumption.

a. Transfer payments are any monies that the government gives you, e.g., welfare or social security; They do not form an exchange or create output, and are not included in GDP. The correct answer is: are not included in GDP because they do not represent current production of goods and services.

Corporate profits are a component of which approach to calculating GDP? Select one: a. The expenditures approach b. The income approach c. The savings approach d. The total product approach

b. Corporate profits are not considered to be expenditures. They are factor payments to the owners of a firm and are considered to be income. They are a component of the income approach but are not a component of the expenditure approach.

Which of the following statements best describes the equality between total income and total expenditures in the economy? Select one: a. Expenditures and income are equal because only households buy goods and services from firms. b. Expenditures and income are equal because firms and government spend money to pay for wages, rent, profits, and other income items. c. The government redistributes income by taxing firms and giving the taxes to households until expenditures equal income. d. All the choices are correct.

b. Firms and governments spend money on goods and services and on factors of production. All these expenditures become income to households or profits to other firms. The correct answer is: Expenditures and income are equal because firms and government spend money to pay for wages, rent, profits, and other income items.

Personal income minus personal income taxes equals Select one: a. national income. b. net domestic product. c. disposable income. d. gross national product.

c. Disposable income equals personal income minus personal income taxes. Disposable income is income that is available to an individual to spend.

The income approach to calculating GDP Select one: a. sums all income received in an economy. b. is derived from the broad measure of national income. c. is illustrated by the circular flow model. d. All of the above are correct.

d