Economic Analysis

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Economic Analysis for Managers

CHAPTER 11 (TECHNICAL QUESTIONS)

1. Do government statistics calculate GDP by simply adding up the total sales of all business firms in one year? Explain.

GDP is the market value of all good and services produced in the United States in one year. It includes only final goods and services, so the sales of any firms producing intermediate goods are not included. GDP is usually calculated by adding up spending on consumption, investment, government, and net export purchases. Investment includes any changes in inventories that occurred during the year. Spending on imported goods must be subtracted from spending

2. Evaluate whether all of the following are considered to be investment (I) in calculating GDP? a) The purchase of new automobile for private, nonbusiness use. b) The purchase of a new house.

c) The purchase of corporate bonds.

Of the three choices given, only the purchase of a new house is considered to be investment when calculating GDP. Investment refers to business purchases of tangible capital goods and software; all construction purchases, both residential and nonresidential; and changes in inventories in the national income accounts. The purchase of an automobile for private, nonbusiness use is treated as consumption spending. The purchase of corporate bonds represents the transfer of ownership of existing assets.

3. Explain whether transfer payments, such as Social security and unemployment compensation are counted as government spending in calculating GDP.

Transfer payments are not counted as part of government spending because they represent transfers of income among individuals and not purchases by government of goods or services. Transfer payments do become part of consumers' income and can influence the consumption-spending category.

4. Is it true that the value of U.S import is added in exports when calculating U.S GDP because import reflects spending by...
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