PP1 - Practice Problems on NIPA and Key Prices 1 What are...

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Practice Problems on NIPA and Key Prices 1- What are the three approaches to measuring economic activity? Why do they give the same answer? The three approaches to national income accounting are the product approach, the income approach, and the expenditure approach. They all give the same answer because they are designed that way; any entry based on one approach has an entry in the other approaches with the same value. Whenever output is produced and sold, its production is counted in the approach, its sale counted in the expenditure approach, and the funds received by the seller are counted in the income approach. 2- What is the difference between intermediate and final goods and services? In which of these categories do capital goods, such as factories and machines, fall? Why is the distinction between intermediate and final goods important for measuring GDP? Intermediate goods and services are used up in producing other goods in the same period (year) in which they were produced, while final goods and services are those that are purchased by consumers or are capital goods that are used to produce future output. The distinction is important, because we want to count only the value of final goods produced in the economy, not the value of goods produced each step along the way. 3- List the four components of total spending. Why are imports subtracted when GDP is calculated in the expenditure approach? The four components of spending are consumption, investment, government purchases, and net exports. Imports must be subtracted, because they are produced abroad and we want GDP to count only those goods and services produced within the country. For example, suppose a car built in Japan is imported into the United States. The car counts as consumption spending in U.S. GDP, but is subtracted as an import as well, so on net it does not affect U.S. GDP. However, it is counted in Japan’s GDP as an export. 4- Define private saving. How is private saving used in the economy? What is the relationship between private saving and national saving? Private saving is private disposable income minus consumption. Private disposable income is total output minus taxes paid plus transfers and interest received from the government. Private saving is used to finance investment spending, the government budget deficit, and the current account. National saving is private saving plus government saving. 5- For the purposes of assessing an economy’s growth performance, which is the more important statistic: real GDP or nominal GDP? Why? Real GDP is the useful concept for figuring out a country’s growth performance. Nominal GDP may rise because of increases in prices rather than growth in real output.
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6- Describe how CPI and CPI inflation are calculated. What are some reasons that CPI inflation may overstate true inflation? The CPI is a price index that is calculated as the value of a fixed set of consumer goods
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PP1 - Practice Problems on NIPA and Key Prices 1 What are...

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