Chapter 4: Quiz Answers -- Output and National Income

1. Using the expenditure approach, GDP would include all the following except
   The production of steel used to construct skyscrapers. Remember that the expenditure approach counts only final goods and services. Steel for use in skyscrapers is an intermediate good, so it is not counted directly using the expenditure approach. Education services are final services and should be counted in the expenditure approach to GDP, even if the actual process of valuing educational services is difficult.

2. The main difference between GDP and GNP is that
   GDP counts production of final goods and services produced in the US, while GNP counts production of final goods and services by US citizens. The difference between GNP and GDP is net factor payments, or the income earned by U.S. citizens abroad minus income earned by foreign entities in the U.S.

3. If the US experienced a devastating earthquake, GDP would most likely
   increase due to production necessary to repair the damage. Yes, it's true. GDP is an excellent--but not perfect--measure of the economic health of the nation. This scenario highlights a weakness of GDP.

4. Which of the following is a measured component of GDP using any of the three methodologies to count GDP?
   The glass industry produced $400 million in glass to go into new houses. Although the glass is not a final good and will not be counted in the "expenditure" approach, the glass will appear in the value added approach to calculating GDP. The other three measures will not be counted at all because the goods are either not traded through the market (the labor for the house addition), are purely financial transactions (stock transactions), or are part of the underground economy (babysitting income not reported).

5. GDP is not a perfect measure of the health of the economy because
   all of the above.

6. GDP in the US is currently near
   $13.0 trillion.. For the latest quarterly update, see the Federal Reserve Bank of St. Louis web site.

7. If production by US firms located outside of the U.S. exceeded production by foreign firms located in the U.S. then
   GNP would exceed GDP. If net factor payments are positive, as they are in this question, then U.S. citizens earned more from production abroad than foreigners earned from production activity inside the U.S. Therefore, GNP must have exceeded GDP.

8. A recession is loosely defined as
   six or more consecutive months of decline in the economy's level of output. The National Bureau of Economic Research officially dates business cycles, but this definition tends to be quite accurate.

9. Business cycles seem to be recent phenomena that are probably caused by political interference in the economy.
   False. Business cycles have been around since capitalism itself. Political interference may exacerbate recessions at times, but cycles seem to have a life of their own independent of politics. Even Karl Marx in the mid-nineteenth century thought that the increasing severity of business cycles would be a factor in bringing about the end of capitalism.

10. GDP per capita is a good measure of the average standard of living in an economy.
    True. GDP per capital, however, tells us nothing about the distribution of that income.