ch02 - CHAPTER 2 NATIONAL INCOME ACCOUNTING Solutions to...

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CHAPTER 2 NATIONAL INCOME ACCOUNTING Solutions to Problems in the Textbook : Conceptual Problems: 1. Government transfer payments (TR) do not arise out of any production activity and are thus not counted in the value of GDP. If the government hired the people who currently receive transfer payments, then their wages would be counted as part of government purchases (G), which is counted in GDP. Therefore GDP would rise. 2.a. If the firm buys a car for an executive's use, the purchase counts as investment (I). But if the firm pays the executive a higher salary and she then buys a car, the purchase is counted as consumption (C). 2.b. The services that a homemaker provides are not counted in GDP (regardless of their value). However, if an individual officially hires his or her spouse to perform household duties at a certain wage rate, then the wages earned will be counted in GDP and GDP will increase. 2.c. If you buy a German car, consumption (C) will increase but net exports (NX = X - Q) will decrease. Overall GDP will increase by the value added at the foreign car dealership, since the import price is likely to be less than the sales price. If you buy an American car, consumption and thus GDP will increase. (Note: If the car you buy comes out of the car dealer's inventory, then the increase in C will be partially offset be a decline in I, and GDP will again only increase by the value added.) 3. GDP is the market value of all final goods and services currently produced within the country. (The U.S. GDP includes the value of the Hondas produced by a Japanese-owned assembly plant that is located in the U.S., but it does not include the value of Nike shoes that are produced by an American- owned shoe factory located in Malaysia.) GNP is the market value of all final goods and services currently produced using assets owned by domestic residents. (Here the value of the Hondas produced by a Japanese-owned Honda plant is not counted but the value of the Nikes by the American-owned shoe plant is.) Neither is necessarily a better measure of the output of a nation. The actual value of the GDP and GNP for the U.S. is fairly close. 4. The NDP (net domestic product) is defined as GDP minus depreciation. Depreciation measures the value of the capital that wears out during the production process and has to be replaced. Therefore NDP comes closer to measuring the net amount of goods produced in this country. If this is what you want to measure, then NDP should be used. 5. Increases in real GDP do not necessarily mean increases in welfare. For example, if the population of a country increases by more than real GDP, then the population of the country is on average worse 9
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off. Also some increases in output come from welfare reducing events. For example, increased pollution may cause more lung cancer, and the treatment of the lung cancer will contribute to GDP. Similarly, an increase in crime may lead to overtime work for police officers, whose increased salary
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ch02 - CHAPTER 2 NATIONAL INCOME ACCOUNTING Solutions to...

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