Below is a list of domestic output and national income figures for a certain yea

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.

a. Using the above data, determine GDP by both the expenditures and the income approaches. Then determine NDP.

     GDP using the expenditures approach = $ billion.

GDP using the income approach = $ billion.

NDP = $ billion.

b. Now determine NI in two ways: first, by making the required additions or subtractions from NDP (method 1); and second, by adding up the types of income and taxes that make up NI (method 2).

     Method 1 = $ billion.

     Method 2 = $ billion.

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

     PI = $ billion.

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

     DI = $ billion.

Category Value   Personal consumption expenditures $285   Net foreign factor income 4   Transfer payments 12   Rents 14   Statistical discrepancy 8   Consumption of fixed capital (depreciation) 27   Social Security contributions 20   Interest 13   Proprietors' income 43   Net exports 11   Dividends 16   Compensation of employees 263   Taxes on production and imports 18   Undistributed corporate profits 21   Personal taxes 26   Corporate income taxes 19   Corporate profits 56   Government purchases 82   Net private domestic investment 33   Personal saving 30

Explanation / Answer

Part a:

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

The expenditures approach: GDP = [$245 (Personal consumption expenditures)] + [$33 (Net private domestic investment) + $27 (Consumption of fixed capital, depreciation) (the sum of these two components measures gross investment = $60)] + [$72 (Government purchases)] + [$11 (net exports)] = $245 + $60 + $72 + $11 = $388.

The income approach: GDP = $223 (compensation of employees) + $14 (Rents) + $13 (Interest) + $33 (Proprietor's income) + $56 (Corporate profits) + $18 (Taxes on production and imports) + $27 (Consumption of fixed capital, depreciation) - $4 (Net foreign factor income) + $8 (Statistical discrepancy) = $223 + $14 + $13 + $33 + $56 + $18 + $27 -$4 + $8 = $388

Both methods will give us the same answer.

Net Domestic Product equals GDP minus Consumption of fixed capital (depreciation). NDP = $388 - $27 = $361.

Part b:

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.

Net Domestic Product Approach: National Income = $361 (Net Domestic Product) - $8 (Statistical discrepancy) + $4 (Net foreign factor income) = $357.

Income and Taxes Approach: National Income = $223 (Compensation of employees) + $14 (Rents) + $13 (Interest) + $33 (Proprietor's income) + $56 (Corporate profits) + $18 (Taxes on production and imports) = $357.

Part c:

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

Personal Income = $357 (National Income) - $18 (Taxes on production and imports) -$20 (Social security contributions) - $19 (Corporate income taxes) - $21 (Undistributed corporate profits) + $12 (Transfer payments) = $291.

Part d:

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

Disposable Income = $291 (Personal Income) - $26 (Personal Taxes) = $265.

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