GDP National Income Accounting 5 — Questions and Answers
Question 1: If a country's GDP deflator is 125 and nominal GDP is $5 trillion, what is real GDP (base year = 100)?
- $6.25 trillion
- $4 trillion (Correct answer)
- $5 trillion
- $3.75 trillion
Correct answer: $4 trillion
Real GDP = (Nominal GDP / GDP Deflator) × 100 = ($5T / 125) × 100 = $4 trillion.
Question 2: Net investment equals gross investment minus:
- Government transfers
- Depreciation (capital consumption allowance) (Correct answer)
- Inventory changes
- Net exports
Correct answer: Depreciation (capital consumption allowance)
Net investment is gross investment less depreciation, measuring the actual addition to the capital stock after replacing worn-out capital.
Question 3: Which of these is an example of a 'final good' correctly included in GDP?
- Flour sold by a mill to a bakery
- Steel sold by a producer to an automaker
- A car sold by a dealership to a consumer (Correct answer)
- Cotton sold by a farmer to a textile company
Correct answer: A car sold by a dealership to a consumer
A car sold to an end consumer is a final good; the flour, steel, and cotton are intermediate goods used in further production.
Question 4: Social insurance (payroll) taxes paid by employers affect national income accounts by:
- Being added to personal income
- Being subtracted from National Income to arrive at Personal Income (Correct answer)
- Increasing corporate profits in the income approach
- Reducing government spending in the expenditure approach
Correct answer: Being subtracted from National Income to arrive at Personal Income
Social insurance contributions are part of compensation recorded in National Income but are deducted (along with corporate taxes and retained earnings) when deriving Personal Income.
Question 5: The 'leakages-injections' framework of national income accounting states that in equilibrium:
- Saving + Taxes + Imports = Investment + Government spending + Exports (Correct answer)
- Saving = Investment only
- Taxes = Government spending only
- Imports = Exports only
Correct answer: Saving + Taxes + Imports = Investment + Government spending + Exports
In a three-sector open economy, all leakages (S + T + M) must equal all injections (I + G + X) for income to be in equilibrium.
Question 6: Which best describes the difference between GDP and GNI (Gross National Income)?
- GDP includes transfer payments; GNI excludes them
- GNI adjusts GDP by adding income earned by residents abroad and subtracting income earned by foreigners domestically (Correct answer)
- GNI equals GDP minus depreciation
- GDP is measured at market prices; GNI at factor cost
Correct answer: GNI adjusts GDP by adding income earned by residents abroad and subtracting income earned by foreigners domestically
GNI (formerly GNP) shifts from a location-based to a nationality-based measure by adding net factor income received from abroad to GDP.
Question 7: In the income approach to GDP, 'net interest' refers to:
- Interest paid by the government on the national debt
- Interest received by businesses from households minus interest paid by businesses to households and foreigners (Correct answer)
- The Federal Reserve's interest rate policy target
- Corporate bond yields minus Treasury yields
Correct answer: Interest received by businesses from households minus interest paid by businesses to households and foreigners
Net interest in the income approach is interest income received by businesses from lending, net of interest paid out, representing a return to capital lenders.
GDP National Income Accounting 5
If a country's GDP deflator is 125 and nominal GDP is $5 trillion, what is real GDP (base year = 100)?