Chap 6 - Measuring Domestic Output and National Income...

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Measuring Domestic Output and National Income ANSWERS TO END-OF-CHAPTER QUESTIONS 6-1 In what ways are national income statistics useful? N a t i o n a l i n c o m e a c c o u n t i n g d o e s f o r t h e e c o n o m y as a whole what private accounting does for businesses. Firms measure income and expenditures to assess their economic health. T h e n a t i o n a l i n c o m e a c c o u n t i n g s y s t e m m e a s u r e s the level of production in the economy at some particular time and helps explain that level. By comparing national accounts over a number of years, we can track the long-run course of the economy. Information supplied by national accounts provide a basis for designing and applying public policies to improve the performance of the economy. Without national accounts, economic policy would be guesswork. National income accounting allows us to assess the health of an economy and formulate policies to maintain and improve that health. 6-2 Explain why an economy’s output, in essence, is also its income? E v e r y t h i n g t h a t i s p r o d u c e d i s s o l d , e v e n i f the “selling,” in the case of inventory, is to the producing firm itself. Since the same amount of money paid out by the buyers of the economy’s output is received by the sellers as income (looking only at a private-sector economy at this point), “an economy’s output is also its income.” 6-3 ( Key Question ) Why do economists include only final goods in measuring GDP for a particular year? Why don’t they include the value of stocks and bonds sold? Why don’t they include the value of used furniture bought and sold? T h e d o l l a r v a l u e o f f i n a l g o o d s i n c l u d e s t h e d o l l a r value of intermediate goods. If intermediate goods were counted, then multiple counting would occur. The value of steel (intermediate good) used in autos is included in the price of the auto (the final product). T h i s v a l u e i s n o t i n c l u d e d i n G D P b e c a u s e s u c h s a l e s a n d p u r c h a s e s s i m p l y t r a n s f e r t h e ownership of existing assets; such sales and purchases are not themselves (economic) investment and thus should not be counted as production of final goods and services. U s e d f u r n i t u r e w a s p r o d u c e d i n s o m e p r e v i o u s year; it was counted as GDP then. Its resale does not measure new production. 6-4 What is the difference between gross private domestic investment and net private domestic investment? If you were to determine net domestic product (NDP) through the expenditures approach, which of these two measures of investment spending would be appropriate? Explain. G r o s s p r i v a t e d o m e s t i c i n v e s t m e n t l e s s d e p r e c i a t i o n i s n e t p r i v a t e d o m e s t i c i n v e s t m e n t . Depreciation is the value of all the physical capital—machines, equipment, buildings—used up in
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Chap 6 - Measuring Domestic Output and National Income...

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