Question

Suppose the following data are available for an economy (figures in billions of dollars) \- Compensation of Employees 642 \- Income Taxes 116 \- Capital Consumption Allowances 95 \- Income other than Compensation of Employees 209 \- Indirect Taxes 101 \- Net Investment 152 Further, it is known that there are no corporations, and all income is paid directly to persons; there are no transfer payments, there is a balanced budget; and government expenditure is exclusively on the provision of services to the economy. Calculate each of the following: 1\. Gross National Product (GNP) 2\. Net National Product (NNP) 3\. National Income (NI) 4\. Personal Income 5\. Disposable Personal Income 6\. Government Sector Gross Output 7\. Private Sector Gross Output 8\. Consumption Expenditure 9\. Gross Investment

Short answer

In summary, for this economy: 1. GNP = \(947 billion\) 2. NNP = \(852 billion\) 3. NI = \(751 billion\) 4. Personal Income = \(751 billion\) 5. Disposable Personal Income = \(635 billion\) 6. Government Sector Gross Output = \(101 billion\) 7. Private Sector Gross Output = \(846 billion\) 8. Consumption Expenditure = \(483 billion\) 9. Gross Investment = \(247 billion\)

Step-by-step solution

1. Calculate Gross National Product (GNP)

GNP = Compensation of Employees + Income other than Compensation of Employees + Capital Consumption Allowances + Indirect Taxes GNP = 642 + 209 + 95 + 101 GNP = \(947 billion\)

2. Calculate Net National Product (NNP)

NNP = GNP - Capital Consumption Allowances NNP = 947 - 95 NNP = \(852 billion\)

3. Calculate National Income (NI)

NI = NNP - Indirect Taxes NI = 852 - 101 NI = \(751 billion\)

4. Calculate Personal Income

Personal Income = National Income Personal Income = 751 Personal Income = \(751 billion\)

5. Calculate Disposable Personal Income

Disposable Personal Income = Personal Income - Income Taxes Disposable Personal Income = 751 - 116 Disposable Personal Income = \(635 billion\)

6. Calculate Government Sector Gross Output

Government Sector Gross Output = Government Expenditure + Indirect Taxes Government Sector Gross Output = 0 (balanced budget) + 101 Government Sector Gross Output = \(101 billion\)

7. Calculate Private Sector Gross Output

Private Sector Gross Output = GNP - Government Sector Gross Output Private Sector Gross Output = 947 - 101 Private Sector Gross Output = \(846 billion\)

8. Calculate Consumption Expenditure

Consumption Expenditure = Disposable Personal Income - Net Investment Consumption Expenditure = 635 - 152 Consumption Expenditure = \(483 billion\)

9. Calculate Gross Investment

Gross Investment = Net Investment + Capital Consumption Allowances Gross Investment = 152 + 95 Gross Investment = \(247 billion\) In conclusion, the values for each economic measure are: 1. Gross National Product (GNP): \(947 billion\) 2. Net National Product (NNP): \(852 billion\) 3. National Income (NI): \(751 billion\) 4. Personal Income: \(751 billion\) 5. Disposable Personal Income: \(635 billion\) 6. Government Sector Gross Output: \(101 billion\) 7. Private Sector Gross Output: \(846 billion\) 8. Consumption Expenditure: \(483 billion\) 9. Gross Investment: \(247 billion\)

Key concepts

Net National Product (NNP)

Net National Product, or NNP, can be thought of as the Gross National Product (GNP) adjusted for depreciation. Depreciation, in economic terms, refers to the wear and tear of capital assets over time. When calculating NNP, this depreciation is known as the Capital Consumption Allowance.
\[ \text{NNP} = \text{GNP} - \text{Capital Consumption Allowances} \]
In essence, NNP provides a more accurate reflection of an economy's actual productivity by considering the costs associated with maintaining its capital assets. This measurement allows economists and policymakers to understand how sustainable the production levels are without overestimating the economy's output.

National Income (NI)

National Income (NI) is a measure of the total income earned by a nation's people and businesses. It forms the backbone of economic analysis and assessment. Start by deriving it from the NNP by subtracting Indirect Taxes, which do not belong to the actual earnings of individuals or companies.
\[ \text{NI} = \text{NNP} - \text{Indirect Taxes} \]
This figure is crucial as it provides insight into the distributable income within a nation's economy and is used to assess economic health and guide fiscal policy decisions.

Disposable Personal Income

Disposable Personal Income represents the portion of individual income that people have available for spending and saving after accounting for income taxes. It directly impacts consumer spending and saving behaviors. Calculate it by deducting Income Taxes from Personal Income, where Personal Income is equal to National Income in this case.
\[ \text{Disposable Personal Income} = \text{Personal Income} - \text{Income Taxes} \]
Understanding this concept is key for evaluating consumer behavior and planning future economic strategies because it ultimately influences demand levels in the economy.

Government Sector Gross Output

The Government Sector Gross Output considers the total output attributed to government activities in the economy. It is calculated by summing up Government Expenditures and Indirect Taxes. With a balanced budget, government expenditures mirror their revenue, and therefore, this measure primarily reflects the government's capacity to provide services.
\[ \text{Government Sector Gross Output} = \text{Government Expenditures} + \text{Indirect Taxes} \]
By analyzing this output, one can infer how government functions and its economic footprint within the national economy.

Private Sector Gross Output

This refers to the total value of goods and services produced by the private sector. Calculating it involves subtracting the Government Sector Gross Output from the Gross National Product (GNP).
\[ \text{Private Sector Gross Output} = \text{GNP} - \text{Government Sector Gross Output} \]
This measure offers insights into the private sector's contribution to the overall economy, indicating the extent of economic activity fueled by private enterprises. It helps highlight the balance of contributions between public and private sectors.

Consumption Expenditure

Consumption Expenditure is the total value of all goods and services consumed by households. It is a reflection of consumer demand and spending power. To find Consumption Expenditure, subtract Net Investment from Disposable Personal Income:
\[ \text{Consumption Expenditure} = \text{Disposable Personal Income} - \text{Net Investment} \]
This calculation provides insights into consumer behavior and economic stability. It's a key indicator for understanding financial health, as high consumption typically reflects economic confidence and growth.

Gross Investment

Gross Investment captures the total spending on new capital assets within the economy, including both new investments and replacement of depreciated assets. Essentially, it's calculated by adding Net Investment to Capital Consumption Allowances:
\[ \text{Gross Investment} = \text{Net Investment} + \text{Capital Consumption Allowances} \]
This value indicates the rate at which the economy is expanding its capital base, crucial for the economy's future productive capacity. A higher gross investment rate suggests a robust pathway for future growth.