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When total output is measured as the sum of Total Expenditures, the result is gross domestic
product. Total Expenditures consists of four types of spending; consumption, investment,
government purchases, and net exports. When total output is measured as the sum of all
payments to resource owners, the result is national income. National income consists of five
types of payments; employee compensation, proprietors’ income, corporate profits, rental income,
and net interest income.
When comparing different economies, per capita output numbers may be more informative than
total output numbers. There is significant variation in the standard of living in the different U.S.
states.
Nominal GDP numbers may change from one year to the next either because production has
changed, or because of a change in the price level. Real GDP is GDP adjusted for changes in the
price level. Absolute economic growth refers to an increase in Real GDP. Real GDP tends to
behave in a cyclical manner, called the business cycle. The four phases of the business cycle are
called expansion, peak, contraction, and trough.
Questions for Chapter 5
Fill-in-the-blanks:
1. Gross ______________________ ______________________ is the market value of all
final goods and services produced annually.
2. A(n) ______________________ good is an input in the production of another good or has
been purchased for resale.
3. ______________________ ______________________ are transfers of income from the
government to households or businesses, not in exchange for goods, services, or
resources.
4. ______________________ is the acquisition of new physical capital.
5. ______________________ are total foreign purchases of domestic goods.
6. ______________________ are total domestic purchases of foreign goods.
7. ______________________ GDP is GDP adjusted for changes in the price level.
8. Absolute ______________________ ______________________ refers to an increase
in Real GDP.
Multiple Choice:
___ 1. Which of the following would directly affect GDP?
a. A refinery buys crude oil
b. A refinery takes out a large loan from a bank
c. A refinery emits pollution into the air
d. None of the above
___ 2. For GDP purposes, which of the following would be investment spending?
a. Warren buys 100 shares of common stock for $6,000
b. Charlie buys a used lawn mower for his lawn service business
c. Lynda buys a new display case for her jewelry store
d. All of the above
FOR REVIEW ONLY - NOT FOR DISTRIBUTION
Measuring Total Output: GDP 5 - 10