Kennedy cited,GDP also ignores the imputed rent on durable goods such as cars,re gerat wnm owers many se es and pro cts produced as part of house cleaning;and the value of good produced and sold in illegal activities,such as the drug trade.These imperfections in the measurement of GDP do not necessarily reduce its usefulness.As long as these measurement problems stay constant over time,then GDP is useful in 0 rom yea year.Moreo alarge GDP allows us to afford better medical care for our children,newer books for the r education and more toys for their play. CHAPTER3 National Income:Where It Comes From and Where It Goes Ouestions for Review 1.What determines the amount of output an economy produces? 1.Factors of production and the production technology determine the amount of output an economy can produce.Factors of production are the inputs used to produce goods and services:the most important factors are capital and labor.The vei how nch ou pu can be produced from y An increase in one of the factors of production or an improvement in technology leads to an increase in the economy's output. 4.What determines consumption and investment? 4.Consumption depends positively on disposable income -the amount of income after all taxes have been paid.The higher disposable income is,the greater consumption is.The quantity of investment goods demanded depends negatively on the real interest rate for an investment to be profitable its return must be greater than its cos Because the erest rate m easures the cost of funds. higher real interest rate makes it more costly to invest,so the demand for investment goods falls 5.Explain the difference between government purchases and transfer payments. Give two examples of each. 5.Government purchases are those goods and services purchased directly by the government.For example,the government buys missiles and tanks,builds roads,and provides 11 services such as air traffic control.All of these activities are part of GDP.Transfer payments are government payments to individuals Kennedy cited, GDP also ignores the imputed rent on durable goods such as cars,refrigerators,and lawnmowers many services and products produced as part of household activity,such as cooking and cleaning;and the value of goods produced and sold in illegal activities,such as the drug trade.These imperfections in the measurement of GDP do not necessarily reduce its usefulness.As long as these measurement problems stay constant over time, then GDP is useful in comparing economic activity from year to year.Moreover, a large GDP allows us to afford better medical care for our children,newer books for their education and more toys for their play. C H A P T E R 3 National Income: Where It Comes From and Where It Goes Questions for Review 1.What determines the amount of output an economy produces? 1.Factors of production and the production technology determine the amount of output an economy can produce.Factors of production are the inputs used to produce goods and services:the most important factors are capital and labor.The production technology determines how much output can be produced from any given amounts of these inputs. An increase in one of the factors of production or an improvement in technology leads to an increase in the economy’s output. 4.What determines consumption and investment? 4.Consumption depends positively on disposable income—the amount of income after all taxes have been paid. The higher disposable income is,the greater consumption is. The quantity of investment goods demanded depends negatively on the real interest rate.For an investment to be profitable,its return must be greater than its cost. Because the real interest rate measures the cost of funds,a higher real interest rate makes it more costly to invest,so the demand for investment goods falls. 5.Explain the difference between government purchases and transfer payments. Give two examples of each. 5.Government purchases are those goods and services purchased directly by the government. For example, the government buys missiles and tanks,builds roads,and provides 11 services such as air traffic control. All of these activities are part of GDP. Transfer payments are government payments to individuals