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Chapter 23

Measuring a Nation's Income

Educators

SA

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 N.
Numerade Educator

Problem 2

Fill in the blanks:

Jesse N.
Numerade Educator

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.

Kaylee M.
Numerade Educator

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?

Kaylee M.
Numerade Educator

Problem 5

Below are some data from the land of milk and honey.

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.

Jesse N.
Numerade Educator

Problem 6

Consider an economy that produces only chocolate bars. In year 1, the quantity produced is 3 bars and the price is \$4. In year 2, the quantity produced is 4 bars and the price is \$5. In year 3, the quantity produced is 5 bars and the price is \$6. 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)?

SA
Salman A.
Numerade Educator

Problem 7

Consider the following data on U.S. GDP:

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 $\times$ $[(X_{final}/X_{initial})^{1/N} -1$].)
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.

Jesse N.
Numerade Educator

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 N.
Numerade Educator

Problem 9

A farmer grows wheat, which she sells to a miller for \$100. The miller turns the wheat into flour, which she sells to a baker for \$150. The baker turns the wheat into bread, which she sells to consumers for \$180. Consumers eat the bread.
a. What is GDP in this economy? Explain.
b. $Value \space added$ 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 economy's GDP? Does this example suggest another way of calculating GDP?

Jesse N.
Numerade Educator

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 N.
Numerade Educator

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 N.
Numerade Educator

Problem 12

One day, Barry the Barber, Inc., collects \$400 for haircuts. Over this day, his equipment depreciates in value by \$50. Of the remaining \$350, Barry sends \$30 to the government in sales taxes, takes home \$220 in wages, and retains \$100 in his business to add new equipment in the future. From the $220 that Barry takes home, he pays \$70 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 N.
Numerade Educator