Economics (McConnell) AP Edition, 19th Edition

Problem:

Suppose the government's national income and product accounts reveal 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 + I_g + G + X_n. In this example, GDP = 525 + 110 + 72 – 15 = 692. The income approach to GDP combines compensation of employees (462), proprietors' income (59), interest (29), rents (26), corporate profits (75), taxes on production and imports (22), and consumption of fixed capital (31), less net foreign factor income (12). These also sum to 692.
2. NDP, or net domestic product, is equal to GDP less depreciation. NDP = 692 – 31 = 661.
3. NI = NDP plus net foreign factor income. NI = 661 + 12 = 673. Alternatively, NI equals the sum of compensation of employees, proprietors' income, interest, rents, corporate profits, and taxes on production and imports. NI = 462 + 59 + 29 + 26 + 75 + 22 = 673.
4. PI = NI less taxes on production and imports, Social Security contributions, corporate income taxes and undistributed corporate profits, plus transfer payments. PI = 673 – 22 –39 – 28 – 17 + 33 = 600.
5. DI = PI minus personal taxes. DI = 600 – 71 = 529.
6. Personal consumption expenditures plus 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
   2009	$1536	128
   2010	$1663	132
   2011		135	$1274
   2012	$1792	140

   
   
4. Find real GDP in years 2009, 2010, and 2012.
5. Find nominal GDP in year 20011.

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. 2009 real GDP is $1536/1.28 = $1200. 20010 real GDP is $1663/1.32 = $1260. In 2012, real GDP is $1792/1.40 = $1280.
5. Nominal GDP for 20011 is found by multiplying that year's real GDP by (one one-hundredth of) the price index for that year. 2009 nominal GDP = $1274 x 1.35 = $1720.