A.

National income accounting refers to the government bookkeeping system that

measures the health of an economy, projected growth, economic activity, and
development during a certain period of time. It helps in assessing the performance of
an economy and the flow of money in an economy. The double entry system principle
of accounting is used to prepare the national income accounts. it provides useful
insight into how well an economy is functioning, and where monies are being
generated and spent. When combined with information regarding the associated
population, data regarding per capita income and growth can be examined over a
period of time.
 the metrics calculated by using national income accounting are includes:
 gross domestic product (GDP)
 gross national product (GNP), and
 gross national income (GNI)

B. The Bureau of Economic Analysis (BEA) gives a clear definition for GDP:
Gross domestic product (GDP) is the value of the goods and services produced by
the nation’s economy less the value of the goods and services used up in production.
GDP is also equal to the sum of personal consumption expenditures, gross private
domestic investment, net exports of goods and services, and government consumption
expenditures and gross investment. It is the total market value of all final goods and
services produced within a national border in a year.
 As described in Bureau of Economic Analysis (2015), there
are different approaches to measuring GDP.
 The “expenditure approach,” in which GDP is measured as
the sum of consumption, investment, government spending, and net exports, is the
most familiar to many people. (GDP=C + I + G + (X – M)).
C is consumer expenditures, I is business investment, G is government spending on
goods and services, and (X–M) is net exports (exports minus imports).
 The “income approach,” adds up the earnings of everyone in the economy, including
wages, profits, investment income, and rental income. (GDP = Total National Income
+ Sales Taxes + Depreciation + Net Foreign Factor Income)
 The “production approach” simply adds up the dollar value of all final goods and
services produced in the economy. (Gross Value Added = Gross Value of Output –
Value of Intermediate Consumption GDP = Sum of all value-added to products
during the production of a process).
 problems with GDP measurement
 Underground Economy (black market): refers to cash and barter transactions that are
not formally recorded in GDP and are often used to support the trade of illegal goods
and services (i.e., drugs, weapons, prostitution, etc.).
 Environmental Abuses: Often, producers can increase their output by polluting or
damaging the environment. In developed countries, production is better regulated, and
companies that violate environmental laws can face severe fines and penalties. However,
many developing economies rely on high output to support the growth of their own
economies and are less concerned with environmental issues. 
 Increases in Product Quality: As technology advances, producers are able to offer
increasingly better products for reduced production costs. For example, smartphone
 manufacturers may be producing phones with better cameras, more advanced
processors, and higher-quality displays. Thus, consumers experience higher utility
than before without being faced with proportionately inflated prices. Such
advancements are not counted in GDP since relative utility gains are difficult to
quantify.
 Non-Market Production: refers to goods and services that are produced for private
consumption and for which exists no official record of production. For example,
consider people who grow their own food or manufacture their own electricity.
C. the difference between GDP and GNP: The key difference between GDP and GNP
is that GNP considers the output of a country’s citizens regardless of where that
economic activity occurred. By contrast, GDP considers the activity within a
national economy regardless of the residency of the producers.
 Consider the following situations, which GDP and GNP treat quite
differently
 The net income receipts of foreign companies owned by foreign residents that
produce goods in the country under study. Since GNP only considers citizens of a
country and their economic output, it does not include such companies in its
measurement. However, GDP measures economic output regardless of country of
residence—so it does include such companies in its measurement.
 Companies owned by domestic residents producing goods for global
consumption. Since GNP considers any and all output of domestic residents, it
includes these companies and their economic activity occurs outside the country.
However, GDP only measures the economic output of a given nation’s economy, so it
does not consider this international activity, nor the money remitted to foreign
economies.
 Similarly, GNP will always include net income receipts from the international
investments made by its residents whereas GDP will not. Conversely, GDP will
always include foreign investments within a country’s borders, whereas GNP will
not.
2.
A. GDP in expenditure approach
Given
Consumer expenditure (Non-durable goods =63423, Durable goods = 43213,
services=34532)
Business investment (Residential fixed investment=11234, Inventory investment
1230, Non-residential fixed investment=13421)
Government expenditure (Defense expense=4907, State and local =23479, Non-defense=
3451)
Net export (X-M, 1564-2621=-1057)
Solution

GDP=C+I+G+NX(X-M)
C= Non-durable goods+ Durable goods + Services
63423+43213+34532=141,168
 I=Residential fixed investment + Non-residential fixed investment + Inventory
investment (11234 + 13421 + 1230 = 25,885)
G=Defense expense + local and state + non-defense expense
4907+23279+3451=31,837
NX=X-M (1564-2621=-1057)
GDP=C+I+G+NX(X-M)
=141,168 + 25,885 + 31,837-1057
= 197,833
B. GNP=GDP+NFI
NFI=income from abroad-payment to abroad
=3214-3321
=-1107
GNP= 197833-1107
=196726
C. NFI= income from abroad-payment to abroad
=3214-3321
=-1107
D. Net National Product (NNP) = Gross National Product (GNP) – Depreciation
=196726-1632
=195094
E. national income (NI)= Net National Product – Indirect Business Tax
=195094-3278
=191816
F. net investment (NI)=gross investment-depreciation
= Residential fixed investment + Non-residential fixed
investment + Inventory investment
=11234 + 13421 + 1230
GI = 25,885
NI=25885-1632
=24253
3. A, NGDP=∑P*Q
NGDP of 2017 = 20*30+34*25+70*20
=600+850+1400
=2850
NGDP 0f 2018= 21*30+14*45+12*50
=630+630+600=1860
NGDP of 2019= 30*10+20*15+18*20
=300+300+360
=960
NGDP of 2020= 50*22+55*19+60*15
=1100+1045+900
=3045
3.B RGDP =∑P*Q with the price of 2017 base year
RGDP of 2017=20*30+34*25+70*20
=600+850+1400
=2850
RGDP of 2018=21*30+14*25+12*20
=630+350+240
=1220
RGDP of 2019=30*30+20*25+18*20
=900+500+360
=1760
RGDP OF 2020=50*30+55*25+60*20
=1500+1375+1200
=4075
3.C, GDP deflator =NGDP/RGDP*100
GDP deflator of 2017=2850/2850*100
= 100 %
GDP deflator of 2018 =1860/1220*100
=152.5
GDP deflator of 2019=960/1760*100
=54.5
GDP deflator of 2020=3045/4075*100
=74.7
3. D, what do you understand by GDP deflator?
which shows the price in 2018 was 152.5% higher than the price in base year and all the
rest years.
3.E, Among the two measures (NGDP and RGDP), which one is better and why?
RGDP is better, when comparing GDP across more than one year, economists use real GDP
because, by removing inflation from the equation, the comparison only shows the change in
output volume between the years. That means that real GDP growth reflects a country’s
increased output and is not influenced by inflation increasing price level; and also, nominal
GDP by definition reflects inflation however, real GDP uses a GDP deflator to adjust for
inflation, thus reflecting only changes in real output.

4. A, cost of basket of goods in 2001

=10*30+15*25
=300+375
=675
cost of basket of goods in 2002
10*32+15*26
=320+390
=710
cost of basket of goods in 2003
10*35+15*25
=350+420
=770
cost of basket of goods in 2004
10*29+15*24
=290+360
=650
B.CPI=∑P*Q/∑P*Q in base year
CPI of 2001=675/710*100
=95.1
CPI OF 2002=710/710*100
=100
CPI of 2003=770/710*100
=108.5
CPI of 2004=650/710*100 =91.5
4. C, inflation rate =CPI of current year- CPI of previous year/CPI of previous year*100
Inflation rate of 2002= CPI of 2002- CPI of 2001/CPI of 2002*100
=100-95.1/95.1*100
=4.9/95.1*100
=5.2%
Inflation rate of 2003= CPI of 2003- CPI of 2002/CPI of 2002*100
=108.5-100/100*100
=8.5/100*100
=8.5%
Inflation rate of 2004= CPI of 2004- CPI of 2003/CPI of 2003*100
=91.5-108.5/108.5*100
=-17/108.5*100
=-15.7%
N.B: the inflation rate is negative it shows the price deflation is occur, this means prices
generally fall in an economy.

4.D, The CPI versus the GDP Deflator

The GDP deflator and the CPI give somewhat different information about what ‘s
happening to the overall level of prices in the economy. There are three key differences
between the two measures.
1) GDP deflator measures the prices of all goods and services produced, whereas the CPI
measures the prices of only the goods and services bought by consumers. Thus, an
increase in the price of goods bought by firms or the government will show up in the
GDP deflator but not in the CPI.
2) GDP deflator includes only those goods produced domestically. Imported goods are not
part of GDP and do not show up in the GDP deflator.
3) The CPI assigns fixed weights to the prices of different goods, whereas the GDP
deflator
assigns changing weights. In other words, the CPI is computed using a fixed basket of
goods, whereas the GDP deflator allows the basket of goods to change over time as the
composition of GDP changes.
4. E, Problems through measuring CPI
While the CPI is a convenient way to compute the cost of living and the relative price level
across time, because it is based on a fixed basket of goods, it does not provide a
completely accurate estimate of the cost of living. Three problems with the CPI deserve
mention: the substitution bias, the introduction of new items, and quality changes. Let's
examine each of these in detail.
Substitution Bias
The first problem with the CPI is the substitution bias. As the prices of goods and services
change from one year to the next, they do not all change by the same amount. The number
of specific items that consumers purchase changes depending upon the relative prices of
items in the fixed basket. But since the basket is fixed, the CPI does not reflect consumer's
preference for items that increase in price little from one year to the next.
Introduction of New Items
The second problem with the CPI is the introduction of new items. As time goes on, new
items enter into the basket of goods and services purchased by the typical consumer. For
example, if in time period 4 consumers in Country B began to purchase books, this would
need to be included in an accurate estimate of the cost of living. But since the CPI uses
only a fixed basket of goods, the introduction of a new product cannot be reflected.
Instead, the new items, books, are left out of the calculation in order to keep time period 4
comparable with the earlier time periods.

Quality Changes
The third problem with the CPI is that changes in the quality of goods and services are not
well handled. When an item in the fixed basket of goods used to compute the CPI
increases or decreases in quality, the value and desirability of the item changes. For
example, if backrubs in time period 4 suddenly became much more satisfying than in
earlier time periods, but the price of backrubs did not change, then the cost of living would
remain the same while the standard of living would increase. This change would not be
reflected in the CPI from one year to the next. While the Bureau of Labor Statistics
attempts to correct this problem by adjusting the price of goods in the calculations, in
reality this remains a major problem for the CPI.
5. given
Employed=35 mill.
Unemployed=7 mill.
Adult population=65 mill.
A. Labor force =employed +unemployed
=35 mill. +7 mill.
=42 million
B. Not in labor force= adult population-labor force
=65 mill-42 million
=23 mill.
C. Unemployment rate =unemployed/total labor force*100
=7mil. /42mill. *100
=16.67%
D. Labor for participation rate=labor force/adult population*100
=42million. /65 mill*100
=64.62%