13 The measurement of national income (I)

Chapter Thirteen The measurement of national income (I)

Self-assessment Questions

13.1 False. GDP measures the total value of production of all resident producing units (RPU) of a
territory. If an RPU carries out production abroad, the value of that production will still be
counted in the GDP of this economic territory.

13.2(a) Total expenditure on the garment

= $800 + $900 = $1,700

13.2(b) Value-added of the garment factory

= $300 + $400 – $100 = $600

Value-added of Boutique B
= $900 – $400 = $500

13.2(c) Total value-added

= ($800 – $300) + ($900 – $400) + ($300 + $400 – $100) + $100
= $1,700

13.3 Mr. Wong’s spending is included in investment. It belongs to gross domestic fixed capital
formation.

13.4 The GDP of that year will increase by $200,000. Of this sum, $160,000 is consumption
expenditure and $40,000 is put in increase in inventories.

13.5 This income does not arise from production of goods and services, and will not be counted.

13.6 No. This implicit rental value will be estimated and counted in the GDP.

Multiple Choice Questions

1 A 2 C 3 A 4 B 5 C
6 D 7 D 8 B

1 Reliable data on the income earned by a drug trafficker is difficult to obtain. Hence, it is usually
not included in the actual estimation of GDP.

3 The contribution of the manufacturing sector is measured by the value-added method. It is

counted in the output approach, not the expenditure approach.

6 Option A is wrong. The British engineer employed on permanent basis will be regarded as Hong
Kong resident. His output will be included in Hong Kong’s GDP.

7 Neither the compensation nor the fine arose from production. They would not be counted in the
GDP.

8 Remember to include depreciation because gross domestic fixed capital formation is the sum of
net domestic fixed capital formation and depreciation.

New Introductory Economics 3rd Edition 32 © Pearson Education Asia Limited 2003
Suggested Solutions
 13 The measurement of national income (I)

After total exports of goods are added, do not count domestic exports and re-exports, for the sum
of these two values is total exports of goods.

Short Questions

9(a) Money won in a Mark Six Lottery will not be counted, because it does not arise from current
production.

9(b) Wages received as a stockbroker will be included as they represent the value of services
currently provided.

9(c) Proceeds from the sale of used cars will not be included as there is no current production.

9(d) Rental receipts are included as it represents the value of services provided.

10(a) The Filipino maid will be regarded as Hong Kong’s RPU. The value of her services will be
counted in the GDP.

10(b) The income earned will be included in Hong Kong’s GNP as it is income earned by its resident.

Note that in this case, there is no external factor income flow.

11(a) If the garments have already been sold, their market value has already been included in the
GDP. Even if the garments were destroyed, their value would not be deducted from national
income. Hence, national income would not fall.

11(b) Since the destroyed garments have not been included in the GDP, its destruction would have no
effect on GDP.

OR

If the value of garments were treated as the change in inventories while still in the hands of
producers, then any value that would have been created would be destroyed. National income
would fall.

New Introductory Economics 3rd Edition 33 © Pearson Education Asia Limited 2003
Suggested Solutions