Problem:

Suppose the government's national income and product accounts revealed the following information:

1. Using the data in the table, verify that the income approach and the expenditure approach yield the same measure of GDP.
2. Find NDP by making the appropriate adjustment to GDP.
3. Verify that National Income can be found either by making the appropriate adjustments to NDP or by adding up the appropriate components of income and taxes.
4. Find PI, personal income, by making the appropriate adjustments to NI.
5. Make the appropriate adjustment to PI to find DI, disposable income.
6. Verify that DI is the sum of personal consumption expenditures and personal saving.

Answer:

1. Using the expenditure approach, GDP is the sum of C + Ig + G + Xn. In this example, GDP = 525 + 110 + 72 - 15 = 692. The income approach to GDP combines compensation of employees (438), proprietors' income (59), interest (29), rents (26), corporate profits (75), taxes on production and imports (22), net foreign factor income (12), and consumption of fixed capital (31). These also sum to 692.
2. NDP, or net domestic product, is equal to GDP less depreciation. NDP = 692 - 31 = 661.
3. NI = NDP minus net foreign factor income earned in the U.S. NI = 661 - 12 = 649. Alternatively, NI equals the sum of compensation of employees, proprietors' income, interest, rents, corporate profits, and taxes on production and imports. NI = 438 + 59 + 29 + 26 + 75 + 22 = 649.
4. PI = NI less taxes on production and imports, Social Security contributions, corporate income taxes and undistributed corporate profits, plus transfer payments. PI = 649 - 22 -39 - 28 - 17 + 33 = 576.
5. DI = PI minus personal taxes. DI = 576 - 47 = 529.
6. Personal consumption expenditures + personal saving equals 525 + 4 = 529 = DI.

Problem:

Suppose an economy produces only one good. In the base year, production was 8 units at a price of $10 each. The next year, production increased to 9 units and the price of the good increased to $12.

1. Find nominal GDP in years 1 and 2.
2. If the price index is 100 in the base year, what is the value of the price index in year 2?
3. Find real GDP in year 2.

Suppose a hypothetical national economy can be represented by the following data:

Year	Nominal GDP	Price Index (2000 = 100)	Real GDP
2007	$1536	128
2008	$1663	132
2009		135	$1286
20010	$1777	133



4. Find real GDP in years 2007, 2008, and 2010.
5. Find nominal GDP in year 2009

Answer:

1. In this simple economy, nominal GDP is simply the total output for the year times the price in that year. Year 1 nominal GDP is $10x8 = $80, while year 2 nominal GDP is $12x9 = $108.
2. The price index is found as the ratio of the value of year 1's "market basket" evaluated at year 2 prices relative to the same market basket evaluated at year 1 prices (multiplied by 100.) In this example, the year 2 price index is ($12x8)/($10x8) times 100 = 120.
3. Real GDP is equal to nominal GDP divided by (one one-hundredth of) the price index. Year 2 real GDP in this example is $108/1.2 = $90.
4. 2007 real GDP is $1536/1.28 = $1200. 2008 real GDP is $1663/1.32 = $1260. In 2010, real GDP is $1777/1.33 = $1336.
5. Nominal GDP for 2009 is found by multiplying that year's real GDP by (one one-hundredth of) the price index for that year. 2007 nominal GDP = $1286 x 1.35 = $1736.