Economics: Expenditure and Investment Approach

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Questions and Answers

What does consumption (C) refer to in the expenditure approach?

Only spending on non-durable goods

Spending on capital goods only

All personal spending on goods and services (correct)

Only spending on durable goods

Which of the following represents gross private domestic investment (Ig)?

Personal consumption expenditures only

Only residential construction

Residential and nonresidential construction plus machinery purchases (correct)

Net investment excluding depreciation

What is the formula for net investment?

Consumption plus gross investment

Gross investment times depreciation

Gross investment minus consumption of capital (correct)

Gross investment plus depreciation

When does an economy experience positive net investment?

When gross investment exceeds depreciation Signup and view all the answers

What happens when gross investment is less than depreciation?

Negative net investment leads to disinvestment Signup and view all the answers

Which of the following is NOT included in gross private domestic investment?

Consumer spending on services Signup and view all the answers

What does capital inflow refer to in the context of gross private domestic investment?

Investment in new machinery and equipment Signup and view all the answers

Which statement accurately describes depreciation?

It represents outflow of capital Signup and view all the answers

What does it indicate when gross investment equals depreciation in an economy?

The economy has stationary production capacity. Signup and view all the answers

Which component is classified as gross private domestic investment in GDP calculation?

Firms' spending on capital goods. Signup and view all the answers

What does 'net export' represent in the GDP equation?

Total exports minus total imports. Signup and view all the answers

What is included in the GDP formula?

Consumption, investment, government spending, and net exports. Signup and view all the answers

What does the term 'net domestic investment' refer to?

Gross domestic investment less depreciation. Signup and view all the answers

Which spending is categorized under government purchases in GDP?

Expenditures on public goods and services. Signup and view all the answers

Which of the following is NOT included in the GDP equation?

Depreciation of capital assets. Signup and view all the answers

What does DI stand for in the context of income calculation?

Disposable Income Signup and view all the answers

Which option best describes the relationship between gross domestic investment and net exports?

Net exports are added to gross investment to determine total GDP. Signup and view all the answers

Which of the following components contributes to national income?

Wages Signup and view all the answers

How is Nominal GDP calculated?

Current output multiplied by current prices Signup and view all the answers

What indicates that inflation has occurred in terms of GDP measurements?

Nominal GDP exceeds Real GDP Signup and view all the answers

Which of the following is included in calculating corporate profit?

Dividends Signup and view all the answers

What is real GDP adjusted for?

Change in price level Signup and view all the answers

What is included in the income approach of calculating national income?

Tax on production Signup and view all the answers

Which of the following statements about NFFI is correct?

It reflects income received minus income payments to foreign investors. Signup and view all the answers

What may cause an increase in nominal GDP without an increase in real GDP?

Increase in price level Signup and view all the answers

How is inflation calculated according to the provided formula?

INF2 = (GDP PI2 - GDP PI1) / GDPPI1 Signup and view all the answers

Which of the following is not a shortcoming of GDP?

Accounts for leisure time Signup and view all the answers

What is an example of a nonmarket transaction that GDP excludes?

Home-cooked meals consumed at home Signup and view all the answers

Which component is not included in the calculation of GDP?

Imports Signup and view all the answers

What might cause GDP to overstate the overall economy?

Impact of pollution not being accounted Signup and view all the answers

Which type of economic activity is GDP least likely to reflect accurately?

Underground economy transactions Signup and view all the answers

In the government purchases data provided, which of the following is the correct figure?

$15 billion Signup and view all the answers

What is the disposable income according to the provided data?

$75 Signup and view all the answers

What can be concluded about the net foreign factor income from the data?

Zero Signup and view all the answers

How are corporate profits calculated according to the given information?

Subtracting corporate income taxes from the sum of dividends and undistributed corporate profits Signup and view all the answers

What is the value of Personal Consumption Expenditures as per the provided data?

$400 billion Signup and view all the answers

What is the Gross Private Domestic Investment listed in the data?

$88 billion Signup and view all the answers

According to the provided data, what is the Corporation Income Taxes value?

$36 billion Signup and view all the answers

What is the total Gross Domestic Product for the economy based on the provided data?

$623 billion Signup and view all the answers

What amount is stated for Government Purchases in the data?

$128 billion Signup and view all the answers

Study Notes

Expenditure Approach

Measures a nation's GDP by adding up all spending on final goods and services during a specific time period
GDP = C + Ig + G + Xn
- C: Consumption (household spending)
- Ig: Gross Private Domestic Investment (business spending)
- G: Government purchases
- Xn: Net exports (exports minus imports)

Investment

Gross private domestic Investment (Ig): The total amount of spending by firms on new capital goods
- Includes residential and non-residential construction, machinery, equipment, and tools
- Also includes changes in inventory
Net investment: Gross investment minus depreciation
- Depreciation is the wearing out of capital goods over time
- When gross investment exceeds depreciation, the economy experiences positive net investment and growth
- When gross investment is less than depreciation, the economy experiences negative net investment and shrinkage
- When gross investment equals depreciation, the economy is said to be stationary

Income Approach

Measures a nation's GDP by adding up all of the income earned by factors of production during a specific time period.
National Income = Compensation of employees + Rent + Profit + Interest + Indirect Business Taxes
- Compensation of employees: The largest component
- Rent: Payments made to landlords for the use of land
- Profit: Includes proprietors’ income and corporate profit
- Interest: Payments made to lenders of capital goods and borrowed money
- Indirect Business Taxes: Taxes on production and imports

Nominal GDP vs. Real GDP

Nominal GDP: The value of goods and services produced in a country, calculated at current prices
Real GDP: The value of goods and services produced in a country, calculated at constant prices
Nominal GDP may increase due to inflation, while Real GDP may remain the same

Shortcomings of GDP

GDP excludes non-market transactions
GDP excludes the value of leisure time
GDP doesn't account for improved product quality
GDP doesn't account for underground economic activity
GDP overstates overall economy because it doesn’t include the impacts of pollution ### Net Domestic Product (NDP)
Measure of a country's total output that has been adjusted to account for depreciation
NDP = GDP – Depreciation

National Income (NI)

Measure of total income earned by the factors of production in the economy
NI = NDP + Net Foreign Factor Income

Personal Income (PI)

Measure of total income received by households and individuals
PI = NI – (Undistributed Corporate Profits + Corporate Income Taxes + Social Security Contributions) + Transfer Payments + Net Interest

Disposable Income (DI)

Measure of total income that households and individuals have available to spend or save
DI = PI - Personal Taxes

Other Key Terms

Net Foreign Factor Income (NFFI): Income earned by domestic residents from foreign sources, minus income earned by foreign residents from domestic sources
Statistical Discrepancy: The difference between the expenditure approach and the income approach to GDP
- This discrepancy arises because some income earned in the economy may not be fully captured in the income approach.
Transfer Payments: Payments made by the government to individuals, such as social security, unemployment, and welfare, that are not earned income.

Example Data and Calculations

GDP: $125 billion (from the first example data set)
NDP: $120 billion (GDP – Depreciation = $125 - $5 = $120)
Disposable Income: $77 billion (PI - Personal Taxes from the second example data set)

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Description

This quiz covers the Expenditure Approach to measuring GDP, which sums up consumer, investment, government spending, and net exports. Additionally, it delves into the significance of Gross Private Domestic Investment, its components, and the concept of net investment. Test your understanding of these vital economic concepts.