ch 7 measuring growth

8/10/2019 Ch 7 Measuring Growth

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Chapter 7

6ew 1. Which of the following are included and which are e*cluded in calculating this year:sGDP? )*plain in each instance.

;a< " monthly scholarship check recei!ed &y an economics student;&< =he purchase of a new truck &y a trucking company;c< Go!ernment purchase of missiles from a pri!ate &usiness;d< =he purchase of a used tractor &y a farmer;e< =he !alue of the purchase of shares of >icrosoft &y an indi!idual


;a< %ocial security checks recei!ed &y a retired person;&< "n increase in &usiness in!entories;c< =he income of a ta* accountant working for a &usiness;d< 9ncome recei!ed from interest on a corporate &ond;e< =he cashing in of a $.%. sa!ings &ond


(a) " homeowner who mows her own lawn(b) " decline in the a!erage hours worked per week;c< 4usiness e*penditures on pollution control euipment;d< 9ncome from illegal drug acti!ities;e< =he person who purchases a health care product


(a) "n auto mechanic who fi*es his own car at home(b) 5ash recei!ed from selling a corporate &ond

;c< %pending &y a city go!ernment on a waste treatment plant;d< =he pleasure that people o&tain from working at @o&s they like;e< " !eteran:s payment made to a retired military officer

6ew 1'. )*plain the two different ways of looking at GDP.

1(. Define the four categories of e*penditures which comprise GDP.

1,. Gi!e the three categories which comprise gross in!estment and e*plain the difference&etween them.

1/. 6et in!estment can &e positi!e+ negati!e+ or Aero+ &ut gross in!estment can ne!er &e lessthan Aero. )*plain.

6ew 17. ;5onsider =his< )*plain how a reser!oir can ser!e as an analogy for thinking a&out anation:s capital stock+ in!estment+ and depreciation.

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Measuring Domestic Output and National Income

18. )*plain what is and what is not included in go!ernment purchases in GDP.

2. Define net e*ports.

21. What are the components of national income? What is the relati!e share going to wagesand salaries and to corporate profits?

22. What ad@ustments need to &e made to go from national income to GDP?

23. ow does 6DP differ from GDP?

2'. ow does the personal income measure differ from the disposa&le income measure?

2(. =he following is a list of figures for a gi!en year in &illions of dollars. $sing this data+

computeB ;a< GDPC ;&< 6DPC ;c< 69C ;d< P9C ;e< D9C ;f< 6et e*ports.

=ransfer payments................................................ 1,Go!ernment purchases.............................................7Personal ta*es...........................................................375orporate income ta*es............................................279ndirect &usiness ta*es..............................................1(%ocial security contri&utions......................................7$ndistri&uted corporate profits................................18Proprietor:s income..................................................2(5ompensation of employees..................................2(7Personal consumption e*penditures.......................3225onsumption of fi*ed capital.....................................'

ents.........................................................................1$.%. e*ports..............................................................1'5orporate profits....................................................../9nterest......................................................................12Di!idends.................................................................239mports to $.%..........................................................1/Gross pri!ate domestic in!estment..........................,36et foreign factor income earned in the $.%............1

6ew 2,. What is the GDP inde*?

2/. ow is a price inde* computed?

27. Differentiate &etween nominal and real GDP.

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Chapter 7

28. =he following ta&le shows the price of a specific stereo recei!er for a fi!e#year period.$sing year 3 as the &ase year+ calculate the price inde* for each year.

#ear Price Price inde$

1 77 EEE 2 1 EEE 3 12 EEE ' 132 EEE ( 1' EEE

3. =he ne*t four uestions refer to the following price and output data o!er a fi!e#yearperiod for an economy that produces only one good. "ssume that year 2 is the &aseyear.

%nits o! Price

#ear output per unit

1 1, 22 2 33 3 '

' 3, (( ' ,

;a< 9f year 2 is the &ase year+ gi!e the price inde* for year 3.;&< Gi!e the nominal GDP for year '.;c< What is the real GDP for year '?;d< =ell which years you would deflate nominal GDP and which years you would inflatenominal GDP in finding real GDP.

31. What are the two &asic ways of deri!ing real GDP from nominal GDP?

32. =he following ta&le shows the price of a specific stereo recei!er for a fi!e#year period.$sing Fear 1 as the &ase year+ calculate the price inde* for each year.


;answers using Fear 1 1" pp. 112#113J

3. What is the definition of GDP? ow would the !alue of output produced at an"merican#owned factory in the $.%. and a foreign#owned factory in the $.%. &e treatedin GDP accounting?

GDP is a measure of the total market !alue of all final goods and ser!ices producedwithin a country in a year period. =he !alue of output produced at an "merican#ownedfactory in the $.%. and a foreign#owned factory in the $.%. would &oth &e treated as partof domestic output in GDP accounting. =hus+ GDP represents all domestic production.Ite*tB ) pp. 112#113C >" pp. 112#113J

'. Why is GDP a monetary measure?

GDP is a monetary measure to make it possi&le to compare the relati!e worth of adi!erse collection of goods and ser!ices o!er time. 9t is not possi&le to count the

num&er of goods and compare them &ecause the types of goods change o!er time. 9t ispossi&le to count the num&er of goods and attach monetary !alues to them to reflecttheir relati!e worth and then compare the !alue of the output at different points in time.Ite*tB ) p. 113C >" p. 113J

(. )*plain the difference &etween final and intermediate goods+ and gi!e an e*ample ofeach.

Goods are considered to &e -final goods when they reach their final point of sale in thegi!en year. =he te*t&ook e*ample of a final good is the wool suit &ought from a retailstore &y one of its customers. -9ntermediate goods are goods produced during the yearthat will &e used in the production of something else. 9n the wool suit e*ample+ the!alue of the wool sold &y the sheep rancher was not counted when it was sold to the

cloth manufacturer &ecause it would &e used in the process of producing the cloth andlater the suit. 9n other words+ at the wool stage+ the product had not reached its finalpoint of sale for that year.

Other e*amples would include all sorts of raw materials and wholesale goods asintermediate goods. "ny consumer purchase of a good or ser!ice domestically producedin the gi!en year would &e a final e*penditure in the GDP accounts. Ite*tB ) p. 113C >"p. 113J

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,. Why do economists worry a&out -multiple counting and calculate only the -!alueadded in the production process?

Only the !alue of final goods is included in the calculation of GDP &ecause that !alueincludes the !alue of the production of all intermediate goods. =o include the !alue offinal goods and all intermediate goods would lead to a multiple counting oro!erstatement of the siAe of GDP.

=o make the GDP calculation+ economists only count the -!alue added at each stage ofthe production process. Kalue added is the market !alue of a firm:s output minus the!alue of inputs &ought from other firms. %umming the !alue of the contri&ution made&y each firm at each stage of the production process ena&les economists to determineGDP. Ite*tB ) pp. 113#11'C >" pp. 113#11'J

/. What is the !alue added &y all the firms "0) from the production of a product asdescri&ed &elow? What did each firm add separately in !alue and what does it total?

Stage o! production Sales "alue o! product

irm " 1+,irm 4 2+(

irm 5 3+/irm D (+2irm ) /+,

=he !alue added &y all firms is /+,+ or the final sales !alue. irm "B added 1+,.irm 4B added 8. irm 5B added 1+2. irm DB addedB 1+(. irm )B added2+'. =he !alue added &y all firms totals /+, and euals the final sales !alue &yirm ) ;/+," pp. 113#11'J

8. 9dentify at least four transactions and other !aria&les which are not included in the GrossDomestic Product.

;1< 6onmarket transactions such as do#it#yourself pro@ects and homemaker ser!ices aree*cludedC ;2< purely financial transactions such as the purchase and sale of stocks and&onds are not includedC ;3< secondhand sales are not includedC ;'< pu&lic and pri!atetransfer payments are e*cludedC ;(< intermediate goods are not included until their pointof final sale that year. Ite*tB ) pp. 113#11'+ 12(C >" pp. 113#11'+ 12(J


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;d< =he illegal drug income would not &e recorded and would not &e included in GDP.Ite*tB ) p. 12,C >" p. 12,J;e< =his consumer purchase would &e part of consumption and would &e included inGDP. Ite*tB ) p. 11(C >" p. 11(J


(a) "n auto mechanic who fi*es his own car at home(b) 5ash recei!ed from selling a corporate &ond

;c< %pending &y a city go!ernment on a waste treatment plant;d< =he pleasure that people o&tain from working at @o&s they like;e< " !eteran:s payment made to a retired military officer

;a< =he work of the mechanic to fi* his own car is not included &ecause it is not amarket transaction. Ite*tB ) pp. 112+ 12(C >" pp. 112+ 12(J

;&< =he &uying and selling of &onds is not included &ecause it represents a financialtransaction only. Ite*tB ) p. 11'C >" p. 11'J

;c< =his spending would &e included as part of go!ernment purchases of goods andser!ices and would &e included in GDP. Ite*tB ) p. 11,C >" p. 11,J

;d< =his pleasure would not &e included in GDP &ecause it is a non#market item anddifficult to !alue. Ite*tB ) p. 12(C >" p. 12(J

;e< This veterans payment is not included in GDP because it is a publictransfer payment. [text: p. !!"# $% p. !!"&

6ew 1'. )*plain the two different ways of looking at GDP.

=here are the e*penditure approach and the income approach to looking at GDP. =hee*penditures approach adds up all the e*penditures used to purchase output from theeconomy. =he income approach looks at the !alue of the income that is deri!ed fromproducing the economy:s output. )ither approach can &e used in calculating GDP andwill produce the same answer. Ite*tB ) pp. 11'#11(C >" pp. 11'#11(J

1(. Define the four categories of e*penditures which comprise GDP.

;1< Personal consumption e*penditures including consumer spending on dura&le goods+nondura&le goods+ and ser!icesC ;2< gross pri!ate domestic in!estment which includes&usiness purchases of machinery+ euipment and tools+ &usiness and residentialconstruction+ changes in &usiness in!entoriesC ;3< go!ernment purchases of goods andser!ices+ e*cluding go!ernment transfer paymentsC ;'< the !alue of net e*ports which isthe !alue of e*ports of goods and ser!ices minus the imports of goods and ser!ices.Ite*tB ) pp. 11(#11,C >" pp. 11(#11,J

1,. Gi!e the three categories which comprise gross in!estment and e*plain the difference&etween them.

Gross in!estment includes ;1< final purchases of machinery+ euipment+ and tools &y&usinessesC ;2< all construction including residentialC ;3< changes in &usinessin!entories. =he first group restates the definition of in!estment goodsC the second itemis houses and &uildings that can yield an income returnC the third group is -unconsumedoutput and is therefore part of in!estment. Ite*tB ) p. 11(C >" p. 11(J

1/. 6et in!estment can &e positi!e+ negati!e+ or Aero+ &ut gross in!estment can ne!er &e lessthan Aero. )*plain.

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Chapter 7

=his is true &y definition. Gross in!estment refers to the amount of in!estment spendingon capital goods &efore allowance is made for depreciation. 9f any capital spendingtakes place+ then the amount has to &e positi!e. 9f none takes place+ gross in!estmentcould &e Aero+ &ut it could ne!er &e less than Aero. Ite*tB ) pp. 11(#11,C >" pp. 11(#11,J

6ew 17. ;5onsider =his< )*plain how a reser!oir can ser!e as an analogy for thinking a&out anation:s capital stock+ in!estment+ and depreciation.

=he amount of water in a reser!oir is a -stock. 9t is similar to the stock of capital goodsin an economy. =he inflow of water to the reser!oir is a -flow and would &e similar togross in!estment. =he outflow of water from the reser!oir is also a -flow and it issimilar to depreciation. 9f the inflow is greater than the outflow+ then gross in!estmentis greater than depreciation so there is an addition to the capital stock+ or net in!estment.9f the inflow of gross in!estment is less than depreciation+ there is a decline in thecapital stock+ or negati!e net in!estment. Ite*tB ) p. 11/C >" p. 11/J

18. )*plain what is and what is not included in go!ernment purchases in GDP.

Go!ernment purchases are go!ernment e*penditures for goods and ser!ices the

go!ernment consumes in producing pu&lic goods. =hese e*penditures are for finalgoods and all direct purchases of resources such as la&or. 9t also includes e*pendituresfor social capital such as highways and &uildings that ha!e a long life. What is notincluded are go!ernment e*penditures for transfer payments such as social security orwelfare &ecause these e*penditures generate no production. Ite*tB ) p. 11,C >" p. 11,J

2. Define net e*ports.

=he !alue of net e*ports euals the !alue of e*ports minus the !alue of imports of goodsand ser!ices. 9f imports e*ceed e*ports+ this will &e a negati!e !alue. Ite*tB ) p. 11/C>" p. 11/J

21. What are the components of national income? What is the relati!e share going to wages

and salaries and to corporate profits?

6ational income is di!ided into compensation of employees ;which includes wages andsalaries and &enefits


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Chapter 7

2/. ow is a price inde* computed?

" price inde* is computed &y comparing the total price of a -market &asket of goodsand ser!ices representing GDP in the gi!en year to the total price of the same market&asket in the &ase year. =he gi!en year:s total price is di!ided &y the &ase year:s totalprice to arri!e at the inde* figure. =he inde* is e*pressed as a percentage+ so if the &aseyear:s prices are higher than the gi!en year+ the inde* will &e less than 1. 9f the gi!enyear:s prices are higher than the &ase year+ the inde* will &e more than 1. =he priceinde* for the &ase year will always &e 1 since the numerator and denominator will &ethe same when the gi!en year and &ase year are the same. Ite*tB ) pp. 123#12(C >" pp.123#12(J

27. Differentiate &etween nominal and real GDP.

6ominal GDP is the actual measured GDP in terms of current year dollars or pricese*isting at the time the output was produced. eal GDP reflects the !alue of GDP afterit has &een corrected for price changes compared to the price le!el in a reference year;called the &ase year" pp. 123#12'J

3. =he ne*t four uestions refer to the following price and output data o!er a fi!e#yearperiod for an economy that produces only one good. "ssume that year 2 is the &aseyear.

%nits o! Price

#ear output per unit

1 1, 22 2 33 3 '' 3, (( ' ,

;a< 9f year 2 is the &ase year+ gi!e the price inde* for year 3.

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;&< Gi!e the nominal GDP for year '.;c< What is the real GDP for year '?;d< =ell which years you would deflate nominal GDP and which years you would inflatenominal GDP in finding real GDP.

;a< 'M3 1.33 for a price inde* of 133

;&< 6ominal GDP 3,

( 17;c< eal GDP 17M1.,/ 1/./7 ;appro*." p. 12'J

32. =he following ta&le shows the price of a specific stereo recei!er for a fi!e#year period.$sing Fear 1 as the &ase year+ calculate the price inde* for each year.


;answers using Fear 1 1anagement+ the pu&lic e*penditurescomponent of the Construction rogress Reporting Survey+ and the 5ensus 4ureau:s

Survey of "overnment #inance. 6et e*port data is o&tained from the $.%. 5ustoms%er!ice and 4)" sur!eys of potential domestic e*porters and importers. Ite*tB ) p. 12/C>" p. 12/J

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ch 7 measuring growth

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