Question

Sorry this is a long question, it had three parts that all relate to the table

Some economists argue that GDP overstates the level of economic well-being because:

a. there is no adjustment for the value of leisure time.

b. the existence of a positive level of net exports results in a flow of goods and services outside the country; this reduces the standard of living in the country exporting the goods.

c. the environmental costs of production are not taken into account.

d. nonmarket transactions are not included in GDP.

Table 1 (All figures in billions of dollars)
Output (Income)	Taxes	Consumption Spending	Planned Investment	Government Purchases
Y	T	C	I	G
1,200	200	1,000	150	150
1,700	200	1,400	150	150
2,200	200	1,800	150	150
2,700	200	2,200	150	150

42. Refer to Table 1. The equilibrium level of income is equal to _______ billion.

a. $1,700.

b. $1,200.

c. $2,200.

d. $2,700.

43. Refer to Table 1. At an output level of $2,700, there is a tendency for output [Hint: Compare E and Y]

a. to fall.

b. to increase.

c. to remain constant.

d. to either increase or decrease.

Answer 1

Environmental Cost of Production such as pollution(called externalities) are not taken into consideration while calculating GDP. There is a, thus, a tendency for the GDP to remain overstated as the negative externalities are not taken into account.

Thus, Option(c) is correct, that is, the environmental cost of production are not taken into account.

Q42) Equilibrium occurs where Y=AD

At output level Y=1200, Y=AD. Thus, equilibrium income is $1200 billion

Option (b) is correct i.e., $1200

Q43) At output level $2700 billion, AD= $2500 billion,

It means AS>AD, there is a tendency for output to fall.

Option (a) is correct i.e., to fall.