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Chapter 5 Macro (16 Econ)

Work It Out
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You must read each slide, and complete any questions on the slide, in sequence.

Use the following list of GDP components and data (given in millions of $U.S.) to answer the following questions.

A. Indicate whether each component is part of the expenditures approach to calculating GDP (put an “E” next to the component) or the income approach to calculating GDP (put an “I” next to the component).
Corporate profits 1,300
Gross private domestic investment 2,800
Consumption of nondurable goods 3,100
Exports 1,400
Proprietors' income 1,000
Miscellaneous adjustments 700
Consumption of services 4,300
Net interest 500
Compensation of employees 8,000
Imports 1,900
Rental income 400
Government spending 2,100
Consumption of durable goods 1,300
Consumption of fixed capital 1,400
Correct! The expenditures approach includes all spending on final goods and services. The four major categories of spending are personal consumption expenditures, gross private domestic investment, government purchases, and net exports (exports minus imports). Expenditure Approach: GDP = C + I + G + (X - M).
Spending that contributes to GDP provides income to one of the economy’s various inputs or factors of production. This includes compensation of employees, proprietors’ income, corporate profits, rental income, and net interest, along with some statistical adjustments.
For further review, see sections “The Expenditures Approach to Calculating GDP” and “The Income Approach to Calculating GDP.”
Incorrect! The expenditures approach includes all spending on final goods and services. The four major categories of spending are personal consumption expenditures, gross private domestic investment, government purchases, and net exports (exports minus imports). Expenditure Approach: GDP = C + I + G + (X - M).
Spending that contributes to GDP provides income to one of the economy’s various inputs or factors of production. This includes compensation of employees, proprietors’ income, corporate profits, rental income, and net interest, along with some statistical adjustments.
For further review, see sections “The Expenditures Approach to Calculating GDP” and “The Income Approach to Calculating GDP.”
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      B. Compute the GDP using both expenditures and income approach. What factor explains the difference between these measures?
      Corporate profits 1,300
      Gross private domestic investment 2,800
      Consumption of nondurable goods 3,100
      Exports 1,400
      Proprietors' income 1,000
      Miscellaneous adjustments 700
      Consumption of services 4,300
      Net interest 500
      Compensation of employees 8,000
      Imports 1,900
      Rental income 400
      Government spending 2,100
      Consumption of durable goods 1,300
      Consumption of fixed capital 1,400

      GDP using the expenditure approach is $ million, and it is $ million using the income approach. The difference is due to statistical discrepancy.

      Correct! GDP using the expenditures approach is consumption (3,100 + 4,300 + 1,300) + gross private domestic investment (2,800) + government spending (2,100) + exports (1,400) – imports (1,900) = 13,100 million U.S. dollars (or $1.3 billion). GDP using the income approach is compensation of employees (8,000) + proprietors’ income (1,000) + corporate profits (1,300) + rental income (400) + net interest (500) + miscellaneous adjustments (700) + consumption of fixed capital (1,400) = 13,300 million U.S. dollars (or $13.3 billion). The difference between the expenditures approach and the income approach is due to a statistical discrepancy of -$200 million in the income approach. For further review, see sections “The Expenditures Approach to Calculating GDP” and “The Income Approach to Calculating GDP.”
      Incorrect! GDP using the expenditures approach is consumption (3,100 + 4,300 + 1,300) + gross private domestic investment (2,800) + government spending (2,100) + exports (1,400) – imports (1,900) = 13,100 million U.S. dollars (or $1.3 billion). GDP using the income approach is compensation of employees (8,000) + proprietors’ income (1,000) + corporate profits (1,300) + rental income (400) + net interest (500) + miscellaneous adjustments (700) + consumption of fixed capital (1,400) = 13,300 million U.S. dollars (or $13.3 billion). The difference between the expenditures approach and the income approach is due to a statistical discrepancy of -$200 million in the income approach. For further review, see sections “The Expenditures Approach to Calculating GDP” and “The Income Approach to Calculating GDP.”
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          C. Calculate the value of national income. Which category (categories) is (are) not included in national income, but are included in the calculation of GDP using the income approach?
          Corporate profits 1,300
          Gross private domestic investment 2,800
          Consumption of nondurable goods 3,100
          Exports 1,400
          Proprietors' income 1,000
          Miscellaneous adjustments 700
          Consumption of services 4,300
          Net interest 500
          Compensation of employees 8,000
          Imports 1,900
          Rental income 400
          Government spending 2,100
          Consumption of durable goods 1,300
          Consumption of fixed capital 1,400

          National income equals $ million. The category (categories) of is (are) not included in the calculation of national income.

          Correct! Consumption of fixed capital and statistical discrepancy are used to calculate GDP, but are not included in national income. Removing these, national income equals $11,900 million. For further review, see sections “The Expenditures Approach to Calculating GDP” and “The Income Approach to Calculating GDP.”
          Incorrect! Consumption of fixed capital and statistical discrepancy are used to calculate GDP, but are not included in national income. Removing these, national income equals $11,900 million. For further review, see sections “The Expenditures Approach to Calculating GDP” and “The Income Approach to Calculating GDP.”
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