18. The following is a list of figures for a given year in billions of dollars. Using this data, compute: (a) GDP; (b) NDP; (c) NI; (d) PI; (e) DI; (f) Net exports.
Transfer payments $ 16
Government purchases 80
Personal taxes 38
Corporate income taxes 28
Indirect business taxes 15
Social security contributions 8
Undistributed corporate profits 19
Proprietor’s income 25
Compensation of employees 258
Personal consumption expenditures 322
Consumption of fixed capital 4
Rents 10
U.S. exports 14
Corporate profits 70
Interest 12
Dividends 23
Imports to U.S. 17
Gross private domestic investment 63
Net foreign factor income earned in the U.S. 10
19. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in each instance.
(a) A monthly scholarship check received by an economics student
(b) The purchase of a new corncrib by a farmer
(c) The purchase of a used tractor by a farmer
(d) The cashing in of a savings bond
(e) The services of a mechanic in fixing the radiator in his own car
(f) Social security checks received by a retired person
(g) An increase in business inventories
(h) Government purchase of missiles
(i) A barber’s income
(j) Income received from interest on a corporate bond
(k) Cash received from selling a corporate bond
(a) To calculate GDP, we include the value of all final goods and services produced within a country's borders during a given period. A monthly scholarship check received by an economics student is considered a transfer payment and is not included in GDP because it is not an exchange for a current production of goods or services.
(b) The purchase of a new corncrib by a farmer is included in GDP. This is because it involves the purchase of a new final good, which adds to the total value of goods produced in the country.
(c) The purchase of a used tractor by a farmer is not included in GDP. GDP only includes the value of new final goods and services produced, and not transactions involving used goods.
(d) The cashing in of a savings bond is not included in GDP. It is considered a financial transaction and does not represent current production of goods or services.
(e) The services of a mechanic in fixing the radiator in his own car are not included in GDP. This is because GDP only includes goods and services produced for the final market, and the mechanic's services are not exchanged in the market.
(f) Social security checks received by a retired person are not included in GDP. They are considered transfer payments and do not represent current production of goods or services.
(g) An increase in business inventories is included in GDP. This is because it represents the value of goods produced but not yet sold, and is considered investment.
(h) Government purchase of missiles is included in GDP. Government purchases are included in GDP, as they represent expenditure on goods and services.
(i) A barber's income is included in GDP. It represents the value of services provided.
(j) Income received from interest on a corporate bond is not included in GDP. It is considered transfer income and does not represent current production of goods or services.
(k) Cash received from selling a corporate bond is not included in GDP. This is because it is a financial transaction and does not represent current production of goods or services.
To calculate the various measures of economic activity, we will use the given figures for a particular year:
Transfer payments: $16 billion
Government purchases: $80 billion
Personal taxes: $38 billion
Corporate income taxes: $28 billion
Indirect business taxes: $15 billion
Social security contributions: $8 billion
Undistributed corporate profits: $19 billion
Proprietor’s income: $25 billion
Compensation of employees: $258 billion
Personal consumption expenditures: $322 billion
Consumption of fixed capital: $4 billion
Rents: $10 billion
U.S. exports: $14 billion
Corporate profits: $70 billion
Interest: $12 billion
Dividends: $23 billion
Imports to U.S.: $17 billion
Gross private domestic investment: $63 billion
Net foreign factor income earned in the U.S.: $10 billion
(a) GDP (Gross Domestic Product) is the total market value of all final goods and services produced within a country's borders in a given year. To calculate GDP, we sum up the following components:
- Personal consumption expenditures: $322 billion
- Gross private domestic investment: $63 billion
- Government purchases: $80 billion
- Net exports (exports - imports): $14 billion - $17 billion = -$3 billion (as it is negative, we export less than we import)
GDP = $322 billion + $63 billion + $80 billion + (-$3 billion) = $462 billion
(b) NDP (Net Domestic Product) is GDP minus depreciation (consumption of fixed capital).
NDP = GDP - Consumption of fixed capital = $462 billion - $4 billion = $458 billion
(c) NI (National Income) is NDP minus indirect business taxes.
NI = NDP - Indirect business taxes = $458 billion - $15 billion = $443 billion
(d) PI (Personal Income) is NI minus corporate income taxes, social security contributions, and undistributed corporate profits.
PI = NI - Corporate income taxes - Social security contributions - Undistributed corporate profits
PI = $443 billion - $28 billion - $8 billion - $19 billion = $388 billion
(e) DI (Disposable Income) is PI minus personal taxes.
DI = PI - Personal taxes = $388 billion - $38 billion = $350 billion
(f) Net exports are calculated as exports minus imports.
Net exports = Exports - Imports = $14 billion - $17 billion = -$3 billion (as it is negative, we export less than we import)
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Now, let's move on to the next question:
To determine what is included and excluded in calculating this year's GDP, we consider the following situations:
(a) A monthly scholarship check received by an economics student: This is not included in GDP as it is considered a transfer payment, which is already included elsewhere (in this case, personal consumption expenditures).
(b) The purchase of a new corncrib by a farmer: This is included in GDP as it represents a new investment in a final good within the country.
(c) The purchase of a used tractor by a farmer: This is excluded from GDP as it involves the transfer of a previously produced good, not a new production.
(d) The cashing in of a savings bond: This is excluded from GDP as it is a financial transaction and doesn't involve the production of goods or services.
(e) The services of a mechanic in fixing the radiator in his own car: This is not included in GDP as it does not involve a market transaction or the production of a final good or service for sale.
(f) Social security checks received by a retired person: This is not included in GDP as it is considered a transfer payment and is already accounted for in personal consumption expenditures.
(g) An increase in business inventories: This is included in GDP as it represents investment in goods produced within the country.
(h) Government purchase of missiles: This is included in GDP as it represents government purchases of goods produced within the country.
(i) A barber's income: This is included in GDP as it represents compensation of employees for providing a service.
(j) Income received from interest on a corporate bond: This is not included in GDP as it is a transfer of funds and not a payment for goods or services.
(k) Cash received from selling a corporate bond: This is not included in GDP as it is a transfer of funds and not a payment for goods or services.
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