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Chapter 7: Q5. (page 151)

Explain why an economy鈥檚 output, in essence, is also its income.

Short Answer

Expert verified

The output shows the consumer demand in an economy, and all products are produced to meet the demand. If the income is low, the demand will also be low and vice versa.

Step by step solution

01

Gross Domestic Product

GDP is the overall production of a nation during a specific time period. GDP accounts for the value of visible and invisible items produced in a country when the national income is calculated. GDP is one of the major factors used to analyze the economy鈥檚 performance over a period of time.

02

Output as an essence of income

The output in the economy is produced according to the demand. All goods and services produced in an economy will eventually get sold.The producers will produce the goods, and the consumers will consume them for their needs.

The money paid by the consumer to the producer will be the producer's income, and the consumer uses their income to purchase goods and services. The flow of output and flow of money in an economy will be the same. So the economy鈥檚 output is the essence of its income.

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Most popular questions from this chapter

Suppose GDP is \(16 trillion, with \)10 trillion coming from consumption, \(2 trillion coming from gross investment, \)3.5 trillion coming from government expenditures, and \(500 billion coming from net exports. Also suppose that across the whole economy, depreciation (consumption of fixed capital) totals \)1 trillion. From these figures, we see that net domestic product equals:

a. \(17.0 trillion

b. \)16.0 trillion

c. $15.5 trillion

d. none of the above

Suppose that this year鈥檚 nominal GDP is \(16 trillion. To account for the effects of inflation, we construct a price-level index in which an index value of 100 represents the price level 5 years ago. Using that index, we find that this year鈥檚 real GDP is \)15 trillion. Given those numbers, we can conclude that the current value of the index is:

a. higher than 100.

b. lower than 100.

c. still 100.

Suppose that this year鈥檚 nominal GDP is \(16 trillion. To account for the effects of inflation, we construct a price-level index in which an index value of 100 represents the price level 5 years ago. Using that index, we find that this year鈥檚 real GDP is \)15 trillion. Given those numbers, we can conclude that the current value of the index is:

a. higher than 100.

b. lower than 100.

c. still 100.

Why do national income accountants compare the market value of the total outputs in various years rather than actual physical volumes of production? What problem is posed by any comparison over time of the market values of various total outputs? How is this problem resolved?

Suppose that California imposes a sales tax of 10 percent on all goods and services. A Californian named Ralph then goes into a home improvement store in the state capital of Sacramento and buys a leaf blower that is priced at \(200. With the 10 percent sales tax, his total comes to \)220. How much of the \(220 paid by Ralph is in the national income and product accounts as private income (employee compensation, rents, interest, proprietor鈥檚 income, and corporate profits)?

a. \)220

b. \(200

c. \)180

d. none of the above
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