CH 7 Measuring Growth

Measuring Domestic Output and National Income
CHAPTER 7
Measuring Domestic Output

and National Income
A. Short-Answer, Essays, and Problems
1. Of what use is national income accounting to economists and to policy makers?
2. Define GDP and its characteristics.
3. What is the definition of GDP? How would the value of output produced at an
American-owned factory in the U.S. and a foreign-owned factory in the U.S. be treated
in GDP accounting?
4. Why is GDP a monetary measure?
5. Explain the difference between final and intermediate goods, and give an example of
each.
6. Why do economists worry about multiple counting and calculate only the value
added in the production process?
7. What is the value added by all the firms AE from the production of a product as
described below? What did each firm add separately in value and what does it total?
Stage of production
Firm A
Firm B
Firm C
Firm D
Firm E
Sales value of product

$1,600
2,500
3,700
5,200
7,600
New 8. What is the value added by all the firms AE from the production of a product as
Stage of production
Firm A
Firm B
Firm C
Firm D
Firm E

$4,500
8,600
14,700
20,100
32,300
9. Identify at least four transactions and other variables which are not included in the Gross
Domestic Product.
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Chapter 7
New 10. Which of the following are included and which are excluded in calculating this years
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
(a) Social security checks received by a retired person
(b) An increase in business inventories
(c) The income of a tax accountant working for a business
(d) Income received from interest on a corporate bond
(e) The cashing in of a U.S. savings bond
(a)
A homeowner who mows her own lawn
(b)
A decline in the average hours worked per week
(c) Business expenditures on pollution control equipment
(d) Income from illegal drug activities
(e) The person who purchases a health care product
(a)
An auto mechanic who fixes his own car at home
(b)
Cash received from selling a corporate bond
(c) Spending by a city government on a waste treatment plant
(d) The pleasure that people obtain from working at jobs they like
(e) A veterans payment made to a retired military officer
New 14. Explain the two different ways of looking at GDP.
15. Define the four categories of expenditures which comprise GDP.
16. Give the three categories which comprise gross investment and explain the difference
between them.
17. Net investment can be positive, negative, or zero, but gross investment can never be less
than zero. Explain.
New 18. (Consider This) Explain how a reservoir can serve as an analogy for thinking about a
nations capital stock, investment, and depreciation.
110

19. Explain what is and what is not included in government purchases in GDP.
20. Define net exports.
21. What are the components of national income? What is the relative share going to wages
and salaries and to corporate profits?
22. What adjustments need to be made to go from national income to GDP?
23. How does NDP differ from GDP?
24. How does the personal income measure differ from the disposable income measure?
25. The following is a list of figures for a given year in billions of dollars. Using this data,
compute: (a) GDP; (b) NDP; (c) NI; (d) PI; (e) DI; (f) Net exports.
Transfer payments................................................$ 16
Government purchases.............................................80
Personal taxes...........................................................38
Corporate income taxes............................................28
Indirect business taxes..............................................15
Social security contributions......................................8
Undistributed corporate profits................................19
Proprietors income..................................................25
Compensation of employees..................................258
Personal consumption expenditures.......................322
Consumption of fixed capital.....................................4
Rents.........................................................................10
U.S. exports..............................................................14
Corporate profits......................................................70
Interest......................................................................12
Dividends.................................................................23
Imports to U.S..........................................................17
Gross private domestic investment..........................63
Net foreign factor income earned in the U.S............10
New 26. What is the GDP index?
27. How is a price index computed?
28. Differentiate between nominal and real GDP.
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Chapter 7
29. The following table shows the price of a specific stereo receiver for a five-year period.
Using year 3 as the base year, calculate the price index for each year.
Year
1
2
3
4
5
Price
$88
$100
$120
$132
$140
Price index
___
___
___
___
___
30. The next four questions refer to the following price and output data over a five-year
period for an economy that produces only one good. Assume that year 2 is the base
year.
Units of
output
16
20
30
36
40
Year
1
2
3
4
5
Price
per unit
$2
3
4
5
6
(a) If year 2 is the base year, give the price index for year 3.
(b) Give the nominal GDP for year 4.
(c) What is the real GDP for year 4?
(d) Tell which years you would deflate nominal GDP and which years you would inflate
nominal GDP in finding real GDP.
31. What are the two basic ways of deriving real GDP from nominal GDP?
Using Year 1 as the base year, calculate the price index for each year.
Year
1
2
3
4
5
Price
Price index
(answers using
Year 1 = 100)
$112
144
160
176
200
___
___
___
___
___
33. What is the relationship between real GDP, nominal GDP, and the price index?
112

34. The following data show nominal GDP and the appropriate price index for several years.
Compute real GDP for each year and indicate whether you have inflated or deflated
nominal GDP in finding real GDP. All GDP are in billions.
Year
1
2
3
4
5
6
Nominal
GDP
$117
124
143
149
178
220
Price level
index
120
104
85
96
112
143
Real GDP
___
___
___
___
___
___
Inflated (I)
Deflated (D)
___
___
___
___
___
___
35. Discuss the merits and demerits of GDP as a measure of the economys output
performance and as a measure of its standard of living.
36. A witness told a congressional committee that if the United States doubled its real GDP,
it would be a much less livable society than it is today. Explain this view.
37. The expanding underground economy creates problems for economic policy makers.
Explain.
38. (Last Word) Where do government economists get the data for the national income
accounts?
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Chapter 7
B. Answers to Short-Answer, Essays, and Problems

1. Of what use is national income accounting to economists and to policy makers?
There are three basic reasons for the importance of national income accounting. First, it
gives us a measure of the state of the economy at a particular point in time. Second, it
permits us to track the condition of the economy over time to see whether it has grown
or stagnated. Third, it provides the basis for making economic policy decisions. [text: E
p. 112; MA p. 112]
2. Define GDP and its characteristics.
GDP is the total market value of all final goods and services produced in the economy in
one year. It is a monetary measure that excludes nonproductive transactions, such as the
value of stock or bond sales, the sales of used goods, and public or private transfer
payments. GDP is a measure of value added. It avoids multiple counting by measuring
the value of final goods and services and excludes the value of intermediate goods.
[text: E pp. 112-113; MA pp. 112-113]
3. What is the definition of GDP? How would the value of output produced at an
American-owned factory in the U.S. and a foreign-owned factory in the U.S. be treated
in GDP accounting?
GDP is a measure of the total market value of all final goods and services produced
within a country in a year period. The value of output produced at an American-owned
factory in the U.S. and a foreign-owned factory in the U.S. would both be treated as part
of domestic output in GDP accounting. Thus, GDP represents all domestic production.
[text: E pp. 112-113; MA pp. 112-113]
4. Why is GDP a monetary measure?
GDP is a monetary measure to make it possible to compare the relative worth of a
diverse collection of goods and services over time. It is not possible to count the
number of goods and compare them because the types of goods change over time. It is
possible to count the number of goods and attach monetary values to them to reflect
their relative worth and then compare the value of the output at different points in time.
[text: E p. 113; MA p. 113]
5. Explain the difference between final and intermediate goods, and give an example of
each.
Goods are considered to be final goods when they reach their final point of sale in the
given year. The textbook example of a final good is the wool suit bought from a retail
store by one of its customers. Intermediate goods are goods produced during the year
that will be used in the production of something else. In the wool suit example, the
value of the wool sold by the sheep rancher was not counted when it was sold to the
cloth manufacturer because it would be used in the process of producing the cloth and
later the suit. In other words, at the wool stage, the product had not reached its final
point of sale for that year.
Other examples would include all sorts of raw materials and wholesale goods as
intermediate goods. Any consumer purchase of a good or service domestically produced
in the given year would be a final expenditure in the GDP accounts. [text: E p. 113; MA
p. 113]
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6. Why do economists worry about multiple counting and calculate only the value
added in the production process?
Only the value of final goods is included in the calculation of GDP because that value
includes the value of the production of all intermediate goods. To include the value of
final goods and all intermediate goods would lead to a multiple counting or
overstatement of the size of GDP.
To make the GDP calculation, economists only count the value added at each stage of
the production process. Value added is the market value of a firms output minus the
value of inputs bought from other firms. Summing the value of the contribution made
by each firm at each stage of the production process enables economists to determine
GDP. [text: E pp. 113-114; MA pp. 113-114]
7. What is the value added by all the firms AE from the production of a product as
Stage of production
Firm A
Firm B
Firm C
Firm D
Firm E

$1,600
2,500
3,700
5,200
7,600
The value added by all firms is $7,600, or the final sales value. Firm A: added $1,600.
Firm B: added $900. Firm C: added $1,200. Firm D: added: $1,500. Firm E: added
$2,400. The value added by all firms totals $7,600 and equals the final sales value by
Firm E ($7,600). [text: E pp. 113-114; MA pp. 113-114]
New 8. What is the value added by all the firms AE from the production of a product as
Stage of production
Firm A
Firm B
Firm C
Firm D
Firm E

$4,500
8,600
14,700
20,100
32,300
The value added by all firms is $32,300, or the final sales value. Firm A: added $4,500.
Firm B: added $4,100. Firm C: added $6,100. Firm D: added: $5,400. Firm E: added
$12,200. The value added by all firms totals $32,300 and equals the final sales value by
Firm E ($32,300). [text: E pp. 113-114; MA pp. 113-114]
9. Identify at least four transactions and other variables which are not included in the Gross
Domestic Product.
(1) Nonmarket transactions such as do-it-yourself projects and homemaker services are
excluded; (2) purely financial transactions such as the purchase and sale of stocks and
bonds are not included; (3) secondhand sales are not included; (4) public and private
transfer payments are excluded; (5) intermediate goods are not included until their point
of final sale that year. [text: E pp. 113-114, 125; MA pp. 113-114, 125]
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Chapter 7
(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
(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 dont represent income earned by providing a productive resource as defined in the
GDP accounts. [text: E p. 114; MA p. 114]
(b) The truck is included because it represents investment. It is a final good that was
produced in the current year. [text: E p. 115; MA p. 115]
(c) The missile purchase is included as part of government spending on goods and
services. [text: E p. 116; MA p. 116]
(d)
The used tractor is not included because it was counted when it was new. [text:
E p. 114; MA p. 114]
(e)
The value of a stock purchase is not included because it is just a swap of paper
assets. [text: E p. 114; MA p. 114]
(a) Social security checks received by a retired person
(b) An increase in business inventories
(c) The income of a tax accountant working for a business
(d) Income received from interest on a corporate bond
(e) The cashing in of a U.S. savings bond
(a)A social security payment is not included because it is a transfer payment, not
payment for current productive services. [text: E p. 114; MA p. 114]
(b) An increase in business inventories is included as part of business investment. [text:
E pp. 115-116; MA pp. 115-116]
(c) The accountants income is included because it is payment for productive services
(accounting). [text: E p. 118; MA p. 118]
(d) The income from a corporate bond is included because it is payment for use of
capital resources during that year. [text: E p. 118; MA p. 118]
(e) Cashing a savings bond is not included because it represents a financial transaction
only. [text: E p. 118; MA p. 118]
(a)
A homeowner who mows her own lawn
(b)
A decline in the average hours worked per week
(c) Business expenditures on pollution control equipment
(d) Income from illegal drug activities
(e) The person who purchases a health care product
(a) This lawn mowing work is not included in GDP because it is a non-market
transaction. [text: E p. 125; MA p. 125]
(b) Additions to leisure are not included in GDP calculations. [text: E p. 125; MA p.
125]
(c) Business expenditures on pollution control equipment would be considered
investment and would be included in GDP calculation. [text: E p. 125; MA p. 125]
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(d) The illegal drug income would not be recorded and would not be included in GDP.
[text: E p. 126; MA p. 126]
(e) This consumer purchase would be part of consumption and would be included in
GDP. [text: E p. 115; MA p. 115]
(a)
An auto mechanic who fixes his own car at home
(b)
Cash received from selling a corporate bond
(c) Spending by a city government on a waste treatment plant
(d) The pleasure that people obtain from working at jobs they like
(e) A veterans payment made to a retired military officer
(a) The work of the mechanic to fix his own car is not included because it is not a
market transaction. [text: E pp. 112, 125; MA pp. 112, 125]
(b) The buying and selling of bonds is not included because it represents a financial
transaction only. [text: E p. 114; MA p. 114]
(c) This spending would be included as part of government purchases of goods and
services and would be included in GDP. [text: E p. 116; MA p. 116]
(d) This pleasure would not be included in GDP because it is a non-market item and
difficult to value. [text: E p. 125; MA p. 125]
(e) This veterans payment is not included in GDP because it is a public
transfer payment. [text: E p. 114; MA p. 114]
New 14. Explain the two different ways of looking at GDP.
There are the expenditure approach and the income approach to looking at GDP. The
expenditures approach adds up all the expenditures used to purchase output from the
economy. The income approach looks at the value of the income that is derived from
producing the economys output. Either approach can be used in calculating GDP and
will produce the same answer. [text: E pp. 114-115; MA pp. 114-115]
15. Define the four categories of expenditures which comprise GDP.
(1) Personal consumption expenditures including consumer spending on durable goods,
nondurable goods, and services; (2) gross private domestic investment which includes
business purchases of machinery, equipment and tools, business and residential
construction, changes in business inventories; (3) government purchases of goods and
services, excluding government transfer payments; (4) the value of net exports which is
the value of exports of goods and services minus the imports of goods and services.
[text: E pp. 115-116; MA pp. 115-116]
16. Give the three categories which comprise gross investment and explain the difference
between them.
Gross investment includes (1) final purchases of machinery, equipment, and tools by
businesses; (2) all construction including residential; (3) changes in business
inventories. The first group restates the definition of investment goods; the second item
is houses and buildings that can yield an income return; the third group is unconsumed
output and is therefore part of investment. [text: E p. 115; MA p. 115]
17. Net investment can be positive, negative, or zero, but gross investment can never be less
than zero. Explain.
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Chapter 7
This is true by definition. Gross investment refers to the amount of investment spending
on capital goods before allowance is made for depreciation. If any capital spending
takes place, then the amount has to be positive. If none takes place, gross investment
could be zero, but it could never be less than zero. [text: E pp. 115-116; MA pp. 115116]
New 18. (Consider This) Explain how a reservoir can serve as an analogy for thinking about a
nations capital stock, investment, and depreciation.
The amount of water in a reservoir is a stock. It is similar to the stock of capital goods
in an economy. The inflow of water to the reservoir is a flow and would be similar to
gross investment. The outflow of water from the reservoir is also a flow and it is
similar to depreciation. If the inflow is greater than the outflow, then gross investment
is greater than depreciation so there is an addition to the capital stock, or net investment.
If the inflow of gross investment is less than depreciation, there is a decline in the
capital stock, or negative net investment. [text: E p. 117; MA p. 117]
19. Explain what is and what is not included in government purchases in GDP.
Government purchases are government expenditures for goods and services the
government consumes in producing public goods. These expenditures are for final
goods and all direct purchases of resources such as labor. It also includes expenditures
for social capital such as highways and buildings that have a long life. What is not
included are government expenditures for transfer payments such as social security or
welfare because these expenditures generate no production. [text: E p. 116; MA p. 116]
20. Define net exports.
The value of net exports equals the value of exports minus the value of imports of goods
and services. If imports exceed exports, this will be a negative value. [text: E p. 117;
MA p. 117]
21. What are the components of national income? What is the relative share going to wages
and salaries and to corporate profits?
National income is divided into compensation of employees (which includes wages and
salaries and benefits), rental income, interest income, proprietors income (the income of
sole proprietorships and partnerships), and corporate profits. Corporate profits in turn
are divided into amounts paid out as corporate income taxes, corporate dividends, and
what is undistributed and retained by the corporation. By far the largest share of
national income goes to compensation of employees (72%). The proprietors share
(9.1%) is mostly wage compensation too, so when it is added in, about four-fifths of
national income goes to the wage compensation categories. About a tenth of national
income gets paid out as corporate profits (9.5%). National income accounts separate
corporate profits by the amount paid as corporate income taxes (2.6%), dividends
(5.2%), or what remains undistributed (1.7%). [text: E pp. 117-118; MA pp. 117-118]
22. What adjustments need to be made to go from national income to GDP?
National income shows the amount of income paid as compensation of employees, rents,
interest, proprietors income, corporate income tax, dividends, and undistributed
corporate profit. This amount will be less than GDP, which shows the total expenditures
on all final goods and services. To get to GDP, three items need to be added to national
income. First, indirect business taxes that are paid to government should be added.
These taxes include general sales taxes, excise taxes, business property taxes, license
fees and custom duties. Second, there is an allocation for the consumption of fixed
118

capital (depreciation) that must be added to national income. Third, net foreign factor
income is added to national income. This net foreign factor income is the difference
between what foreign-owned resources earned in the U.S. minus what U.S-owned
resources earn abroad. GDP represents domestic production, regardless of whether
the domestic production with the U.S. was foreign or U.S. owned. So, national income
plus indirect business taxes, plus consumption of fixed capital, plus net foreign factor
income equals GDP. [text: E pp. 117-120; MA pp. 117-120]
23. How does NDP differ from GDP?
The difference between NDP and GDP is the value of the consumption of fixed capital
or depreciation allowance. GDP includes gross private investment expenditures. NDP
includes net private investment expenditures after the depreciation allowance has been
subtracted from gross investment. [text: E pp. 120-121; MA pp. 120-121]
24. How does the personal income measure differ from the disposable income measure?
Disposable income is spendable income after personal taxes have been subtracted from
personal income. [text: E pp. 120-121; MA pp. 120-121]
25. The following is a list of figures for a given year in billions of dollars. Using this data,
compute: (a) GDP; (b) NDP; (c) NI; (d) PI; (e) DI; (f) Net exports.
Transfer payments................................................$ 16
Government purchases.............................................80
Personal taxes...........................................................38
Corporate income taxes............................................28
Indirect business taxes..............................................15
Social security contributions......................................8
Undistributed corporate profits................................19
Proprietors income..................................................25
Compensation of employees..................................258
Personal consumption expenditures.......................322
Consumption of fixed capital.....................................4
Rents.........................................................................10
U.S. exports..............................................................14
Corporate profits......................................................70
Interest......................................................................12
Dividends.................................................................23
Imports to U.S..........................................................17
Gross private domestic investment..........................63
Net foreign factor income earned in the U.S............10
(a) GDP $462; (b) NDP $458; (c) NI $433; (d) PI $394; (e) DI $356; (f) Net exports $-3.
[text: E pp. 117-121; MA pp. 117-121]
New 26. What is the GDP index?
The GDP price index compares the price (or cost) of goods and services that make up
GDP in a specific year to the price of the same set of goods in a reference year. The
GDP is a much broader measure that includes consumer goods and services, capital
goods, goods and services purchased by government, and goods and services entering
world trade. With the GDP index the weights or relative purchases of goods and
services are adjusted continuously and are not fixed as they are for the CPI. [text E pp.
123-124; MA pp. 123-124]
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Chapter 7
27. How is a price index computed?
A price index is computed by comparing the total price of a market basket of goods
and services representing GDP in the given year to the total price of the same market
basket in the base year. The given years total price is divided by the base years total
price to arrive at the index figure. The index is expressed as a percentage, so if the base
years prices are higher than the given year, the index will be less than 100. If the given
years prices are higher than the base year, the index will be more than 100. The price
index for the base year will always be 100 since the numerator and denominator will be
the same when the given year and base year are the same. [text: E pp. 123-125; MA pp.
123-125]
28. Differentiate between nominal and real GDP.
Nominal GDP is the actual measured GDP in terms of current year dollars or prices
existing at the time the output was produced. Real GDP reflects the value of GDP after
it has been corrected for price changes compared to the price level in a reference year
(called the base year). A GDP price index is calculated each year to measure the level of
prices relative to the level of prices in the base year. This price index is then expressed
as a percentage of the base year price level. [text: E pp. 123-125; MA pp. 123-125]
Using year 3 as the base year, calculate the price index for each year.
Year
1
2
3
4
5
Price
$88
$100
$120
$132
$140
Year
1
2
3
4
5
Price
$88
$100
$120
$132
$140
Price index
___
___
___
___
___
Price index
73
83
100
110
117
To get the price index numbers, one would divide the given years price by the year 3
price and multiply the result by 100 to express as a percentage in index form. So the
year 5 index is $140 divided by $120 or 1.17. Multiply 1.17 100 to get 117 expressed
in percentage. [text: E pp. 123-124; MA pp. 123-124]
30. The next four questions refer to the following price and output data over a five-year
period for an economy that produces only one good. Assume that year 2 is the base
year.
Year
1
2
3
4
5
Units of
output
16
20
30
36
40
Price
per unit
$2
3
4
5
6
(a) If year 2 is the base year, give the price index for year 3.
120

(b) Give the nominal GDP for year 4.
(c) What is the real GDP for year 4?
(d) Tell which years you would deflate nominal GDP and which years you would inflate
nominal GDP in finding real GDP.
(a) 4/3 = 1.33 for a price index of 133
(b) Nominal GDP = 36 $5 = $180
(c) Real GDP = 180/1.67 = $107.78 (approx.)
(d) You would deflate nominal GDP for years where the price index is more than 100,
that is, for years 3, 4, and 5. You would inflate the nominal GDP for year 1 since the
price index is less than 100 relative to the base year 2. [text: E pp. 123-125; MA pp.
123-125]
31. What are the two basic ways of deriving real GDP from nominal GDP?
The first method involves computing a price index. This index is a ratio of the price of a
market basket in a given year to the price of the same market basket in a base year, with
the ratio multiplied by 100. To obtain real GDP, divide nominal GDP by the price index
expressed in hundredths.
In the second method, nominal GDP is broken down into prices and quantities for each
year. Real GDP is found by using base-year prices and multiplying them times each
years physical quantities. The GDP price index for a particular year is the ratio of
nominal to real GDP for that year. [text E p. 124; MA p. 124]
Using Year 1 as the base year, calculate the price index for each year.
Year
1
2
3
4
5
Price
Price index
(answers using
Year 1 = 100)
$112
144
160
176
200
___
___
___
___
___
Year
Price
Price index
(answers using
Year 1 = 100)
1
2
3
4
5
$112
114
160
176
200
70
90
100
110
125
[text: E pp. 123-125; MA pp. 123-125]

33. What is the relationship between real GDP, nominal GDP, and the price index?
The GDP price index is useful for calculating real GDP from nominal GDP. The price
index number for a reference period is arbitrarily set at 100. For years when the price
index is below 100, dividing nominal GDP by the price index (in hundredths) inflates
nominal GDP to obtain real GDP. For years when the price index is greater than 100,
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Chapter 7
dividing nominal GDP by the price index (in hundredths) deflates nominal GDP to
obtain real GDP. [text: E pp. 123-125; MA pp. 123-125]
34. The following data show nominal GDP and the appropriate price index for several years.
Compute real GDP for each year and indicate whether you have inflated or deflated
nominal GDP in finding real GDP. All GDP are in billions.
Year
1
2
3
4
5
6
Nominal
GDP
$117
124
143
149
178
220
Price level
index
120
104
85
96
112
143
Real GDP
___
___
___
___
___
___
Inflated (I)
Deflated (D)
___
___
___
___
___
___
Year
1
2
3
4
5
6
Nominal
GDP
$117
124
143
149
178
220
Price level
index
120
104
85
96
112
143
Real GDP
$ 98
119
168
155
159
154
Inflated (I)
Deflated (D)
D
D
I
I
D
D
To get the answers for real GDP change the price index to percent (divide each index by
100), then divide nominal GDP by the percent price index. For example, in year #1,
divide $117 by 1.20 to get $98 in real GDP. If the real GDP is less than the nominal it
has been deflated; if the real GDP is more than the nominal GDP it has been inflated.
[text: E pp. 124-125; MA pp. 124-125]
35. Discuss the merits and demerits of GDP as a measure of the economys output
performance and as a measure of its standard of living.
GDP is a reasonably accurate measure of output performance especially for purposes of
comparison with past performance and with other nations. As long as measurement is
done in a consistent manner from year to year and from country to country then such
comparisons are valid and useful.
As a measure of standard of living, GDP has more shortcomings, but there still is a
strong positive correlation between real GDP per capita and standard of living. As a tool
to compare living standards across countries GDP per capita is useful.
The shortcomings of GDP as a measure of standard of living include some cases where
GDP may overstate real output and some cases where GDP may understate it. In the
category of overstating the standard of living, GDP measures do not deduct for
environmental pollution, for product quality deterioration, and for production of what
one might call necessary evils like devices and services to protect against crime. In the
category of understating the standard of living, GDP measures do not reflect
improvements in product quality, increased leisure time, nonmarket production services,
and all of the production both legal and illegal which falls into the category of the
underground economy. [text: E pp. 125-126; MA pp. 125-126]
36. A witness told a congressional committee that if the United States doubled its real GDP,
it would be a much less livable society than it is today. Explain this view.
122

The witness must be assuming that with such growth would come congestion, waste,
and pollution. In other words, such growth in production would be at the expense of the
environment and perhaps leisure time. There are those who believe in the philosophy
small is beautiful and who would argue that we could improve living standards
without any growth at all, let alone doubling the GDP. These people would argue that
we could use our current resources much more efficiently and maintain the same or
improved standard of living. [text: E p. 126; MA p. 126]
37. The expanding underground economy creates problems for economic policy makers.
Explain.
An expanding underground economy means that much current production is escaping
measurement and GDP figures will be correspondingly understated. This can cause
economists to advocate expansionary policies when the economy may be actually
growing quite rapidly. Such policies could then have harmful effects on economic
stability by overcorrecting nonexistent problems. [text: E p. 126; MA p. 126]
38. (Last Word) Where do government economists get the data for the national income
accounts?
The Bureau of Economic Analysis (BEA) of the Department of Commerce is
responsible for compiling the national income accounts. It gets consumption data from
several Census Bureau surveys such as the Retail Trade Survey, Survey of
Manufacturers, and Service Survey. Data are also obtained from industry trade groups
on such items as auto sales. Investment data comes from all of the above surveys, but in
this case the focus is on the investment components such as shipments of equipment. In
addition, investment data are obtained from the Census Bureaus Housing Starts Survey
and Housing Sales Survey to measure home construction. Nonresidential construction is
measured using data from the Construction Progress Reporting Survey. Changes in
business inventories are measured with information from the Retail Trade Survey, the
Wholesale Trade Survey, and the Survey of Manufacturing. Data on government
purchases come from the U.S. Office of Personnel Management, the public expenditures
component of the Construction Progress Reporting Survey, and the Census Bureaus
Survey of Government Finance. Net export data is obtained from the U.S. Customs
Service and BEA surveys of potential domestic exporters and importers. [text: E p. 127;
MA p. 127]
123

CH 7 Measuring Growth

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Measuring Domestic Output and National Income

Measuring Domestic Output

Sales value of product

Sales value of product

Measuring Domestic Output and National Income

Measuring Domestic Output and National Income

B. Answers to Short-Answer, Essays, and Problems

Measuring Domestic Output and National Income

Sales value of product

Sales value of product

Measuring Domestic Output and National Income

Measuring Domestic Output and National Income

Measuring Domestic Output and National Income

[text: E pp. 123-125; MA pp. 123-125]

Measuring Domestic Output and National Income

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