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Principles of Macroeconomics

N. Gregory Mankiw

Chapter 10

Measuring a Nation’s Income - all with Video Answers

Educators

Chapter Questions

02:28

Problem 1

What components of GDP (if any) would each of the following transactions affect? Explain.
a. Uncle Henry buys a new refrigerator from a domestic manufacturer.
b. Aunt Jane buys a new house from a local builder.
c. The Jackson family buys an old Victorian house from the Walker family.
d. You pay a hairdresser for a haircut.
e. Ford sells a Mustang from its inventory to the Martinez family.
f. Ford manufactures a Focus and sells it to Avis, the car rental company.
g. California hires workers to repave Highway $101 .$
h. The federal government sends your grandmother a Social Security check.
i. Your parents buy a bottle of French wine.
j. Honda expands its factory in Ohio.

Jesse Neumann
Jesse Neumann
Numerade Educator
12:37

Problem 2

Fill in the blanks: $$\begin{array}{lccc}
& \begin{array}{c} \text { Real GDP } \\ \text { (in 2000 } \\ \text { dollars) } \end{array} & \begin{array}{c} \text { Nominal GDP } \\ \text { (in current } \\ \text { dollars) } \end{array} & \begin{array}{c} \text { GDP Deflator } \\ \text { (base year } \\ 2000) \end{array} \\ \hline 1970 & 3,000 & 1,200 & \\ 1980 & 5,000 & & 60 \\ 1990 & & 6,000 & 100 \\ 2000 & & 8,000 & \\ 2010 & & 15,000 & 200 \\ 2020 & 10,000 & & 300 \\ 2030 & 20,000 & 50,000 & \\ \hline \end{array}$$

Oluwadamilola Ameobi
Oluwadamilola Ameobi
Numerade Educator
01:14

Problem 3

The government purchases component of GDP does not include spending on transfer payments such as Social Security. Thinking about the definition of GDP, explain why transfer payments are excluded.

Jesse Neumann
Jesse Neumann
Numerade Educator
01:12

Problem 4

As the chapter states, GDP does not include the value of used goods that are resold. Why would including such transactions make GDP a less informative measure of economic well-being?

Jesse Neumann
Jesse Neumann
Numerade Educator
02:09

Problem 5

Below are some data from the land of milk and honey. $$\begin{array}{lcccc}
& \begin{array}{c} \text { Price } \\ \text { of Milk } \end{array} & \begin{array}{c} \text { Quantity } \\ \text { of Milk } \end{array} & \begin{array}{c} \text { Price } \\ \text { of Honey } \end{array} & \begin{array}{c} \text { Quantity } \\ \text { of Honey } \end{array} \\ \hline 2016 & \$ 1 & 100 \text { quarts } & \$ 2 & 50 \text { quarts } \\ 2017 & 1 & 200 & 2 & 100 \\ 2018 & 2 & 200 & 4 & 100 \end{array}$$a. Compute nominal GDP, real GDP, and the GDP deflator for each year, using 2016 as the base year.
b. Compute the percentage change in nominal GDP, real GDP, and the GDP deflator in 2017 and 2018 from the preceding year. For each year, identify the variable that does not change. Explain why your answer makes sense.
c. Did economic well-being increase more in 2017 or $2018 ?$ Explain.

Breanna Ollech
Breanna Ollech
Numerade Educator
03:52

Problem 6

Consider an economy that produces only chocolate bars. In year 1 , the quantity produced is 3 bars and the price is 4 dollar. In year 2 , the quantity produced is 4 bars and the price is 5 dollar. In year 3 , the quantity produced is
5 bars and the price is 6 dollar. Year 1 is the base year.
a. What is nominal GDP for each of these three years?
b. What is real GDP for each of these years?
c. What is the GDP deflator for each of these years?
d. What is the percentage growth rate of real GDP from year 2 to year $3 ?$
e. What is the inflation rate as measured by the GDP deflator from year 2 to year $3 ?$
f. In this one-good economy, how might you have answered parts (d) and (e) without first answering parts (b) and (c)?

Kaylee Mcclellan
Kaylee Mcclellan
Numerade Educator
18:34

Problem 7

Consider the following data on U.S. GDP: $$\begin{array}{lcc}
& \begin{array}{c} \text { Nominal GDP } \\\text { (in billions of dollars) } \end{array} & \begin{array}{c} \text { GDP Deflator } \\ \text { (base year 2009) } \end{array} \\ \hline 2014 & 17,419 & 108.3 \\ 1994 & 7,309 & 73.8 \end{array}$$
a. What was the growth rate of nominal GDP between 1994 and $2014 ?$ (Hint: The growth rate of a variable $X$ over an $N$ -year period is calculated as $100 \times\left[\left(X_{\text {final }} / X_{\text {initial }}\right)^{1 / N}-1\right] .$ )
b. What was the growth rate of the GDP deflator between 1994 and $2014 ?$
c. What was real GDP in 1994 measured in 2009 prices?
d. What was real GDP in 2014 measured in 2009 prices?
e. What was the growth rate of real GDP between 1994 and $2014 ?$
f. Was the growth rate of nominal GDP higher or lower than the growth rate of real GDP? Explain.

Paul A.
Paul A.
California State Polytechnic University, Pomona
01:31

Problem 8

Revised estimates of U.S. GDP are usually released by the government near the end of each month. Find a newspaper article that reports on the most recent release, or read the news release yourself at http:// www.bea.gov, the website of the U.S. Bureau of Economic Analysis. Discuss the recent changes in real and nominal GDP and in the components of GDP.

Jesse Neumann
Jesse Neumann
Numerade Educator
01:21

Problem 9

A farmer grows wheat, which she sells to a miller for 100 dollar. The miller turns the wheat into flour, which she sells to a baker for 150 dollar. The baker turns the wheat into bread, which she sells to consumers for 180 dollar. Consumers eat the bread.
a. What is GDP in this economy? Explain.
b. Value added is defined as the value of a producer's output minus the value of the intermediate goods that the producer buys to make the output. Assuming there are no intermediate goods beyond those described above, calculate the value added of each of the three producers.
c. What is total value added of the three producers in this economy? How does it compare to the econo$\mathrm{my}^{\prime} \mathrm{s}$ GDP? Does this example suggest another way of calculating GDP?

Kratika Bhadauria
Kratika Bhadauria
Numerade Educator
01:56

Problem 10

Goods and services that are not sold in markets, such as food produced and consumed at home, are generally not included in GDP. Can you think of how this might cause the numbers in the second column of Table 3 to be misleading in a comparison of the economic well-being of the United States and India? Explain.

Jesse Neumann
Jesse Neumann
Numerade Educator
01:53

Problem 11

The participation of women in the U.S. labor force has risen dramatically since $1970 .$
a. How do you think this rise affected GDP?
b. Now imagine a measure of well-being that includes time spent working in the home and taking leisure.How would the change in this measure of well-being compare to the change in GDP?
c. Can you think of other aspects of well-being that are associated with the rise in women's labor-force participation? Would it be practical to construct a measure of well-being that includes these aspects?

Jesse Neumann
Jesse Neumann
Numerade Educator
02:08

Problem 12

One day, Barry the Barber, Inc., collects 400 dollar for haircuts. Over this day, his equipment depreciates in value by 50 dollar. Of the remaining 350 dollar, Barry sends 30 dollar to the government in sales taxes, takes home 220 dollar in wages, and retains 100 dollar in his business to add new equipment in the future. From the 220 dollar that Barry takes home, he pays 70 dollar in income taxes. Based on this information, compute Barry's contribution to the following measures of income.
a. gross domestic product
b. net national product
c. national income
d. personal income
e. disposable personal income

Jesse Neumann
Jesse Neumann
Numerade Educator