GDP National Income Accounting 3 — Questions and Answers
Question 1: Which of the following correctly describes the relationship between GDP and National Income (NI)?
- NI = GDP + depreciation + indirect business taxes
- NI = GDP - depreciation - indirect business taxes (Correct answer)
- NI = GDP - depreciation + net foreign income
- NI = GNP - indirect business taxes only
Correct answer: NI = GDP - depreciation - indirect business taxes
Moving from GDP to National Income requires subtracting depreciation (CCA) and indirect business taxes (net of subsidies) to arrive at factor income earned.
Question 2: The 'value-added' method avoids double-counting in GDP by:
- Only counting final goods and services
- Summing the difference between each firm's sales and its intermediate input purchases (Correct answer)
- Excluding all business-to-business transactions
- Using only consumer expenditure data
Correct answer: Summing the difference between each firm's sales and its intermediate input purchases
The value-added method sums the extra value each stage of production adds, so each input is counted only once across the entire production chain.
Question 3: Personal saving in national income accounting equals:
- Personal income minus consumption
- Disposable income minus personal consumption expenditures (Correct answer)
- National income minus government spending
- GDP minus gross investment
Correct answer: Disposable income minus personal consumption expenditures
Personal saving is the portion of disposable (after-tax) personal income that households do not spend on consumption.
Question 4: In the expenditure approach, gross private domestic investment (GPDI) includes all of the following EXCEPT:
- Construction of new homes
- Business purchases of equipment
- Changes in business inventories
- Purchases of existing factory buildings (Correct answer)
Correct answer: Purchases of existing factory buildings
Purchasing an existing factory is a financial transfer between parties and adds no new production; only newly constructed or manufactured capital is counted.
Question 5: If nominal GDP grows 6% and the GDP deflator rises from 100 to 104, real GDP growth is approximately:
- 10%
- 4%
- 2% (Correct answer)
- 6%
Correct answer: 2%
Real GDP growth ≈ nominal growth minus inflation: 6% − 4% ≈ 2%, reflecting actual output expansion after removing the price-level effect.
Question 6: Which transaction would a national income accountant record as part of US net exports (NX)?
- A US company buying Japanese steel
- A US tourist spending money in France
- A German consumer buying a US-made tractor (Correct answer)
- A US firm paying dividends to a Canadian shareholder
Correct answer: A German consumer buying a US-made tractor
A foreign consumer purchasing a US-produced good is a US export, which adds to net exports in the GDP expenditure equation.
Question 7: Retained earnings (undistributed corporate profits) affect national income accounts by:
- Being excluded from both GDP and National Income
- Being included in National Income but not in Personal Income (Correct answer)
- Being included in Personal Income but not National Income
- Being deducted from Gross National Product
Correct answer: Being included in National Income but not in Personal Income
Retained earnings are part of corporate profits (a National Income component) but are not paid to households, so they are subtracted when moving from NI to Personal Income.
GDP National Income Accounting 3
Which of the following correctly describes the relationship between GDP and National Income (NI)?