Question

Below is a list of domestic output and national income figures for a certain year. All figures are in billions. The questions that follow ask you to determine the major national income measures by both the expenditures and the income approaches. The results you obtain with the different methods should be the same.

Personal consumption expenditures $245

Net Foreign Factor Income 4

Transfer Payments 12

Rents 14

Consumption of fixed capital(depreciation) 27

Statistical Discrepancy 8

Social Security Contributions 20

Interest 13

Proprietors Income 33

Net exports 11

Dividends 16

Compensation of employees 223

Taxes on production and imports 18

Undistributed corporate profits 21

Personal taxes 26

Corporate income taxes 19

Corporate profits 56

Government purchases 72

Net private domestic investment 33

Personal Saving 20

1. Using the above data, determine GDP by both the expenditures and income approaches.

A.) expenditures approach GDP

B.)income approach GDP.

2. Determine NDP.

3. Now determine NI in two ways: first ,by making the required additions or subtractions from NDP; and second by adding up the types of income and taxes that make up NI.

4. Adjust NI (from part b) as required to obtain PI.

5. Adjust PI (from part c) as required to obtain DI.

Answer 1

1. A) Expenditures approach GDP = $511 billion

B) Income approach GDP = $511 billion

2. NDP = $484 billion

3. NI:

a) From NDP adjustments: $464 billion

b) By adding income types and taxes: $464 billion

4. PI = $411 billion

5. DI = $391 billion

Step-by-step explanation:

1. Expenditures and Income approach GDP:

A) Expenditures approach GDP:

GDP = C + I + G + (X - M)

= $245 (Consumption) + $33 (Net private domestic investment) + $72 (Government purchases) + $11 (Net exports)

= $511 billion

B) Income approach GDP:

GDP = Compensation of employees + Rents + Interest + Proprietors Income + Corporate profits + Net Foreign Factor Income

= $223 + $14 + $13 + $33 + $56 + $4

= $511 billion

2. Net Domestic Product (NDP):

NDP = GDP - Depreciation

= $511 - $27

= $484 billion

3. National Income (NI):

a) Adjusting NDP:

NI = NDP - Statistical Discrepancy

= $484 - $8

= $476 billion

b) Summing income types and taxes:

NI = Compensation of employees + Rents + Interest + Proprietors Income + Corporate profits + Net Foreign Factor Income - Taxes on production and imports

= $223 + $14 + $13 + $33 + $56 + $4 - $18

= $476 billion

4. Personal Income (PI):

PI = NI - Corporate income taxes - Undistributed corporate profits - Social Security Contributions - Corporate profits taxes + Transfer Payments

= $476 - $19 - $21 - $20 - $19 + $12

= $411 billion

5. Disposable Income (DI):

DI = PI - Personal taxes - Personal saving

= $411 - $26 - $20

= $391 billion