# Economics problem help.

• Jun 28th 2011, 07:56 AM
rylemdr
Economics problem help.
Hi, I'm new to this website. This is my first post.

I am taking online classes, and this is a subject of mine in economics. This is the problem I am having difficulty with.

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1. Compute the Gross National Product
a) Given the following information, solve (a) the national income
(NI); (b) gross domestic product (GDP), with the use of a Taccount
format.

(PCE) Personal Consumption Expenditure P 770,261
(CE) Compensation of Employees 800,320
(X) Exports of Goods and Services 820,320
(GDKF) Gross Domestic Capital Formation 590,680
(EDIP) Entrepreneurial and Property
Income of Persons 225,944
(GCE) Government Current Expenditures 220,944
(M) Imports of Goods and Services 790,690
(C) Corporate Income 10,628
40
(GIPE) Government Income from Property
and Entrepreneurship 5,000
b) If the net factor income from abroad (NFIA) is equal to 5,000,
what is the level of GNP?
c) If the capital consumption allowance (CCA) and indirect business
taxes (IBT) are equal to 57,399 and 492,223 respectively, what is
the level of GNP?

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I have the basics down.
GDP = C+I+G+(X-M), but I don't know what these other values are. eg. Gross Domestic Capital Formation, and Entrepreneurial Property Income of Persons(I am assuming this is under "I", but I have to be sure) and how they should fit into my equation.

I also do not understand the difference between national income and gdp. Are they not one and the same? Please correct me if I am wrong.

Note: In all honesty, this assignment does count toward my final grade, but I can compute the problem on my own, I just need some guidance.

• Jul 2nd 2011, 07:25 AM
TimM
Re: Economics problem help.
Hi rylemdr

I think I can help with this.

Firstly, regarding National Income, the question is asking you to compute GDP in a certain way. If you think about what GDP is--the total value of all final goods and services sold in a given period--two possible methods for computing GDP immediately spring to mind. 1, the amount of money the demand side of the economy spends on those goods and services. And 2, the amount of money the supply side receives for selling them. By definition the two are the same: aggregate expenditure must be equal to aggregate income (i.e. "national income"), since it is the same monetary flow.

So the question is asking you to compute GDP by adding up the amount of money earnt by all individuals in the economy during that period. Necessarily this is the same amount spent by all individuals (ignoring the foreign sector for simplicity). To find aggregate/national income, then, just sum all the income entries in your table. Check that you have this right by comparing it with the sum of all the expenditure entries. The two sums should be equal by definition.

Regarding the component terms of aggregate expenditure / aggregate income,

PCE is the amount the household sector spends on goods and services in a given period.
CE is the amount the household sector earns from supplying labour to firms.
X is self-explanatory.
GDKF is the amount of new capital formed not taking into account depreciation (net capital formation is gross capital formation adjusted for depreciatioin).
EDIP is the amount households earn from supplying capital to firms and housing services to other households (i.e. rent).
GCE is the amount the govt spends on goods and services.
M is self-explanatory.
GIPE is the same as EDIP but for the govt.
C is the profits firms earn in a given period.

So aggregate expenditure would be PCE + GDKF + GCE + (X - M). This corresponds exactly to C + I + G + NX. And aggregate income would be CE + EDIP + GIPE + C. And by definition PCE + GDKF + GCE + (X - M) = CE + EDIP + GIPE + C.
• Jul 2nd 2011, 03:03 PM
rylemdr
Re: Economics problem help.
Quote:

Originally Posted by TimM
Hi rylemdr

I think I can help with this.

Firstly, regarding National Income, the question is asking you to compute GDP in a certain way. If you think about what GDP is--the total value of all final goods and services sold in a given period--two possible methods for computing GDP immediately spring to mind. 1, the amount of money the demand side of the economy spends on those goods and services. And 2, the amount of money the supply side receives for selling them. By definition the two are the same: aggregate expenditure must be equal to aggregate income (i.e. "national income"), since it is the same monetary flow.

So the question is asking you to compute GDP by adding up the amount of money earnt by all individuals in the economy during that period. Necessarily this is the same amount spent by all individuals (ignoring the foreign sector for simplicity). To find aggregate/national income, then, just sum all the income entries in your table. Check that you have this right by comparing it with the sum of all the expenditure entries. The two sums should be equal by definition.

Regarding the component terms of aggregate expenditure / aggregate income,

PCE is the amount the household sector spends on goods and services in a given period.
CE is the amount the household sector earns from supplying labour to firms.
X is self-explanatory.
GDKF is the amount of new capital formed not taking into account depreciation (net capital formation is gross capital formation adjusted for depreciatioin).
EDIP is the amount households earn from supplying capital to firms and housing services to other households (i.e. rent).
GCE is the amount the govt spends on goods and services.
M is self-explanatory.
GIPE is the same as EDIP but for the govt.
C is the profits firms earn in a given period.

So aggregate expenditure would be PCE + GDKF + GCE + (X - M). This corresponds exactly to C + I + G + NX. And aggregate income would be CE + EDIP + GIPE + C. And by definition PCE + GDKF + GCE + (X - M) = CE + EDIP + GIPE + C.

Thanks for the help. I have calculated the GDP and NI, but sadly, they are not equal :( I have looked this up on the internet and some sources say that, in some cases, they are not equal due to something called the "statistical discrepancy". This is not US data anyway, it is from a different country. Maybe this is why there is a large discrepancy.

Thank you, again, for your assistance. :)
• Jul 4th 2011, 01:37 AM
TimM
Re: Economics problem help.
Actually, the accounts are a bit trickier than I remembered. I went back to my old notes and dug out the major measures of national income:

• GDP = C + I + G + NX
• GNP = GDP + Net Factor Income from Abroad
• Net National Product = GNP - Capital depreciation
• National Income = NNP - Indirect Business Taxes

The capital depreciation account is called capital consumption allowance (CCA) in your question above. So using your accounts,

GDP = PCE + GDKF + GCE + (X - M)
GNP = GDP + NFIA
NNP = GNP - CCA
NI = NNP - IBT

There are usually large statistical discrepancies in these measures as well--no one really knows GDP accurate to two decimal places--but that probably isn't relevant for this question.