Aggregate expenditure equals the sum of consumption expenditure, investment, government expenditure, and exports minus imports, which is the total amount spent buying the production in t
Trang 1A n s w e r s t o t h e R e v i e w Q u i z z e s
Page 124 (page 532 in Economics)
1 Define GDP and distinguish between a final good and an intermediate good Provide examples
GDP is the market value of all the final goods and services produced within a country in a given time period A final good or service is an item that is sold to the final user, that is, the final consumer, government, a firm making investment, or a foreign entity An intermediate good or service is an item that is produced by one firm, bought by another firm, and used as a component of a final good or service For instance, bread sold to a consumer is a final good, but wheat sold to a baker to make the bread is an intermediate good Distinguishing between final goods and services and intermediate goods and services is important because only final goods and services are directly included in GDP; intermediate goods must be excluded to avoid double counting them For example, counting the wheat that
went into the bread as well as the bread would double count the wheat—once as
wheat and once as part of the bread
2 Why does GDP equal aggregate income and also equal aggregate
expenditure?
GDP equals aggregate income because one way to value production is by the cost
of the factors of production employed The cost of the factors production employed
—wages, interest, rent, and profit—equal aggregate income and therefore
aggregate income equals GDP GDP equals aggregate expenditure because
another way to value production is by the price that buyers pay for the production
in the market Aggregate expenditure equals the sum of consumption expenditure, investment, government expenditure, and exports minus imports, which is the total amount spent buying the production in the market Therefore GDP equals aggregate expenditure
3 What are the distinctions between domestic and national, and gross and net?
“Domestic” means that the production being measured is within a country no matter by whom; “national” means that the production is produced by residents of the nation anywhere within the world “Gross” means before subtracting
depreciation “Net” means after subtracting depreciation The terms apply to investment, business profit, and aggregate production
4 MEASURING GDP AND ECONOMIC
67
Trang 2Page 127 (page 535 in Economics)
1 What is the expenditure approach to measuring GDP?
The expenditure approach measures GDP by focusing on aggregate expenditures Data are collected on the different components of aggregate expenditure and then summed Specifically, the Bureau of Economic Analysis collects data on
consumption expenditure, C, investment, I, government expenditure on goods and services, G, and net exports, X − M These expenditures are valued at the prices
paid for the goods and services, called the market price GDP is then calculated as
C + I + G + X − M.
68
Trang 3approach sums all the incomes paid to households by firms for the factors of
production they hire The National Income and Product Accounts divide income into
five categories: compensation of employees; net interest; rental income; corporate profits; and proprietors’ income Adding these income components does not quite equal GDP, because it values the output at factor cost rather than the market price and omits depreciation So, further adjustments must be made to calculate GDP: Indirect taxes and depreciation must be added and subsidies subtracted
3 What adjustments must be made to total income to make it equal GDP?
Total income is net domestic product at factor cost To convert it to gross domestic product at market prices, we must add the depreciation of capital and add indirect taxes minus subsidies
4 What is the distinction between nominal GDP and real GDP?
Nominal GDP is the value of final goods and services produced in a given year valued at the prices of that year Real GDP is the value of final goods and services produced in a given year when valued at the prices of a reference base year By comparing the value of production in the two years at the same prices, we reveal the change in production
5 How is real GDP calculated?
The traditional method of calculating real GDP is to value each year’s production using the constant prices of a fixed base year and then sum all the values
Page 133 (page 541 in Economics)
1 Distinguish between real GDP and potential GDP and describe how each grows over time
Real GDP is the value of final goods and services produced in a given year when valued at the prices of a reference base year Potential GDP is the maximum amount of real GDP that can be produced while avoiding shortages of labor,
capital, land, and entrepreneurial ability that would bring rising inflation So real
GDP is the actual amount produced with the actual level of employment of the nation’s factors of production while potential GDP is the amount that would be
produced if there were full employment of all factors of production with no
shortages Real GDP fluctuates from one year to the next, though it grows more often than it shrinks Potential GDP grows from one year to the next because the quantity of the nation’s resources and technology increase from one year to the next
2 How does the growth rate of real GDP contribute to an improved standard of living?
A benefit of long-term economic growth is the increased consumption of goods and services that is made possible Growth of real GDP also allows more resources to
be devoted to areas such as health care, research, and environmental protection
3 What is a business cycle and what are its phases and turning points?
The business cycle is a periodic but irregular up-and-down movement of total production and other measures of economic activity A business cycle has two phases: recession and expansion The turning points are the peak and the trough
A business cycle runs from a trough to an expansion to a peak to a recession to a trough and then back to an expansion
4 What is PPP and how does it help us to make valid international comparisons
of real GDP?
Trang 4PPP is purchasing power parity To make the most valid international comparisons
of real GDP, we need to value each nation’s production using the same prices
rather than by using exchange rates and the prices within each country because
relative prices within different countries can vary widely As a result, if the real GDP
of each country is valued using the same prices then the comparison of real GDP
among the countries is more accurate
Trang 55 Explain why real GDP might be an unreliable indicator of the standard of living
Real GDP is sometimes used to measure the standard of living but real GDP can be misleading for several reasons Real GDP does not include household production, productive activities done in and around the house by the homeowner Because these tasks often are an important component of people’s work, this omission creates a major measurement problem Real GDP omits the underground economy, economic activity that is legal but unreported or that is illegal In many countries the underground economy is an important part of economic activity, and its
omission creates a serious measurement problem The value of leisure time is not included in real GDP People value their leisure hours and an increase in people’s leisure that enhances people’s economic welfare can lower the nation’s real GDP Environmental damage is excluded from real GDP So an economy wherein real GDP grows but at the expense of its environment, as was the case with Eastern European countries under communism, falsely appears to offer greater economic welfare than a similar economy that grows slightly more slowly but at less
environmental cost
Trang 6A n s w e r s t o t h e S t u d y P l a n P r o b l e m s a n d
A p p l i c a t i o n s
1 Classify each of the following items as a final good or service or an
intermediate good or service and identify each item as a component of
consumption expenditure, investment, or government expenditure on goods
and services:
• Airline ticket bought by a student
Airline tickets are intermediate goods that are used for the final service, airline
flights They are part of consumption expenditure
• New airplanes bought by Southwest Airlines
New airlines purchased by Southwest Airlines are a final good They are part of
investment
• Cheese bought by Domino’s
Cheese bought by Domino’s is an intermediate good
• Your purchase of a new iPhone
This purchase is a final good It is part of consumption expenditure
• New house bought by Bill Gates
A new house purchased by Bill Gates is a final good It is part of investment
Use the following figure illustrates the circular flow model
2 During 2014, flow A was $13.0 trillion, flow B was $9.1 trillion, flow D was $3.3
trillion, and flow E was –$0.8 trillion Calculate (i) GDP and (ii) Government
expenditure
(i) Flow A is aggregate income GDP equals aggregate income, so GDP is $13.0 trillion.
(ii)Government expenditure is $1.4 trillion Aggregate expenditure equals GDP, which
from part (i) is $13.0 trillion Aggregate expenditure is the sum of consumption
expenditure (Flow B), investment (Flow D), government expenditure (Flow C), and
net exports (Flow E) Therefore government expenditure equals aggregate
expenditure minus consumption expenditure minus investment minus net exports
Government expenditure equals $13.0 trillion minus $9.1 trillion minus $3.3 trillion
Trang 7minus −$0.8 trillion, which is $1.4 trillion.
3 Use the following data to calculate aggregate expenditure and imports of goods and services
• Government expenditure: $20 billion
• Aggregate income: $100 billion
• Consumption expenditure: $67 billion
• Investment: $21 billion
• Exports of goods and services: $30 billion
Aggregate expenditure equals aggregate income, so aggregate expenditure equals
$100 billion Aggregate expenditure also equals consumption expenditure plus investment plus government expenditures on goods and services plus exports of goods and services minus imports of goods and services , so imports of goods and services equals consumption expenditure plus investment plus government
expenditure on goods and services plus exports minus aggregate expenditure Using this formula gives imports of goods and services equals $67 billion + $21 billion + $20 billion + $30 billion − $100 billion, which is $38 billion
4 The table lists some national
accounts data for the United States
in 2008
a Calculate U.S GDP in 2008
GDP equals consumption
expenditure plus investment plus
government expenditure plus net
exports, so GDP equals $10,000
billion + $2,000 billion + $2,800
billion − $700 billion, or $14,100
billion
b Explain the approach (expenditure
or income) that you used to
calculate GDP
The expenditure approach was used
Use the following data to work
Problems 5 and 6
Tropical Republic produces only
bananas and coconuts The base
year is 2013, and the tables give the
quantities produced and the prices
5 Calculate nominal GDP in 2013
and 2014
In 2013, nominal GDP is $5,600 In 2014, nominal GDP is $6,100
Nominal GDP in 2013 is equal to total expenditure on the goods and services produced by Tropical Republic in 2013 Expenditure on Tropical Republic on
bananas is 800 bunches of bananas at $2 a bunch, which is $1,600 Expenditure
on coconuts is 400 bunches at $10 a bunch, which is $4,000 Total expenditure is
$5,600, so nominal GDP in 2013 is $5,600
Nominal GDP in 2014 is equal to total expenditure on the goods and services produced by Tropical Republic in 2014 Expenditure on Tropical Republic on
bananas is 900 bunches of bananas at $4 a bunch, which is $3,600 Expenditure
dollars
Consumption
Net operating surplus 3,200
Government
Trang 8on coconuts is 500 bunches at $5 a bunch, which is $2,500 Total expenditure is
$6,100, so nominal GDP in 2014 is $6,100
6 Calculate real GDP in 2014 expressed in base-year prices
Real GDP in 2014 using base-year prices is $6,800 The base-year prices method
calculates the market value of the 2014 quantities at the base-year prices of 2013
To value the 2014 output at 2013 prices, real expenditure on Tropical Republic on
bananas is 900 bunches at $2 a bunch, which is $1,800, and real expenditure on
coconuts is 500 bunches at $10 a bunch, which is $5,000 Adding these two
expenditures shows that real GDP in 2014 using the base-year prices method is
$6,800
7 Use the table to work out in which year the U.S standard of living (i)
increases and (ii) decreases Explain your answer
The standard of living is measured
by real GDP per person The
standard of living increased in
2007 because real GDP per person
increased The standard of living
decreased in 2008 and 2009
because in both years real GDP
per person decreased
8 An island economy produces only
fish and crabs Calculate the
island’s chained-dollar real GDP in
2014 expressed in 2013 dollars
Real GDP in 2014 is $27,300 The
chained-dollar method uses the
prices of 2013 and 2014 to calculate
the growth rate in 2014 The value
of the 2013 quantities at 2013
prices is $25,000 The value of the
2014 quantities at 2013 prices is $1,100 tons of fish × $20 a ton + 525 tons of
crab × $10 a ton, which is $27,250 Using 2013 prices, the increase in GDP for
these two years is $2,250, so the percentage increase is ($2,250 ÷ $25,000) × 100, which is 9.0 percent
Next the value of the 2013 quantities at 2014 prices is 1,000 tons of fish × $30 a
ton + 500 tons of crab × $8 a ton, which is $34,000 The value of the 2014
quantities at 2014 prices is $37,200 Using 2014 prices, the increase in GDP for
these two years is $3, 200 so the percentage increase is ($3,200 ÷ $34,000) ×
100, which is 9.4 percent
The chained dollar method calculates the growth rate as the average of these two percentage growth rates, which means that the growth rate in 2014 is 9.2 percent
So real GDP in 2014 is equal to $25,000, which is real GDP in the base year (and is equal to nominal GDP in that year) multiplied by one plus the growth rate Real
GDP in 2014 is $27,300
2006 $13.0 trillion 300 million
2007 $13.2 trillion 302 million
2008 $13.2 trillion 304 million
2009 $12.8 trillion 307 million
Quantitie
Prices
Trang 9Answers to Additional Problems and Applications
9 Classify each of the following items as a final or an intermediate good or service, and identify which is a component of consumption expenditure, investment, or government expenditure on goods and services:
• Financial services bought by China Investment Corporation
The financial services are an intermediate service
• Desktop computers bought by Barclays
Desktop computer bought by Barclays are a final good It is part of investment
• New taximeters imported from China by the London Taxi Company
New taximeters bought from China by the London Taxi Company are a final good They are part of China’s exports and Britain’s imports
• New DVD bought by a student from Virgin Megastore
A new DVD bought by a student from Virgin Megastore is a final good It is part of consumption expenditure
Use Figure 4.2 to work Problems 10 and 11
10 In 2013, flow A was $1,000 billion, flow C was $250 billion, flow B was $650 billion, and flow E was $50 billion Calculate investment.
Investment is $50 billion Aggregate expenditure equals aggregate income, which
is flow A, $1,000 billion Aggregate expenditure is the sum of consumption
expenditure (Flow B), investment (Flow D), government expenditure (Flow C), and net exports (Flow E) Therefore investment equals aggregate expenditure minus
consumption expenditure minus government expenditure on goods and services minus net exports Investment equals $1,000 billion minus $650 billion minus
$250 billion minus $50 billion, which is $50 billion
Trang 1011 In 2014, flow D was $2 trillion, flow E was –$1 trillion, flow A was $10 trillion,
and flow C was $4 trillion Calculate consumption expenditure.
Consumption expenditure is $5 trillion Aggregate expenditure equals aggregate
income, which is flow A, $10 trillion Aggregate expenditure is the sum of
consumption expenditure (Flow B), investment (Flow D), government expenditure (Flow C), and net exports (Flow E) Therefore consumption expenditure equals
aggregate expenditure minus investment minus government expenditure on goods and services minus net exports Consumption expenditure equals $10 trillion
minus $2 trillion minus $4 trillion minus −$1 trillion, which is $5 trillion
Use the following information to work Problems 12 and 13
The French state-owned DCNS shipyard provides parts and equipment for Brazilian submarines Renault do Brasil produces cars for the Brazilian market in Paraná
12 Explain where these activities appear in the Brazilian National Income and
Product Accounts
When the parts and equipments for Brazilian submarines provided by DCNS are
sent to Brazil, they are counted in the Brazilian National Income and Product
Accounts as imports, which is a negative entry in the expenditure approach to
Brazil’s GDP
Renault do Brasil’s production of cars is included in Brazil’s GDP and expenditure
on the cars is counted as part of consumption expenditure (if the cars are
purchased by Brazilian consumers) or investment (if the cars are purchased by
Brazilian firms) or government expenditure (if the cars are purchased by a
government) in the expenditure approach to GDP If any of the parts of the cars are imported from France, the value of these parts is included among Brazil’s imports
13 Explain where these activities appear in France’s National Income and
Product Accounts
The French state-owned DCNS shipyard will sell parts and equipments produced in France to Brazil Thus, they will enter France’s National Income and Product
Accounts as exports In international trade, the seller of such goods is referred to
as an “exporter” and is based in the country of export, in this case France,
whereas the overseas-based buyer is referred to as an “importer”, in this case
Brazil Exports will increase France’s GDP since they are positive entries in the
expenditure approach The incomes earned by the factors of production that
produce the parts and equipments for Brazil are part of the wages, interest, rent,
and profit income that are used in the income approach to GDP
Since Renault do Brazil is a subsidiary of Renault but operates outside the French
territory, the profit it generates will not be part of France’s GDP but its GNP
Use the following news clip to work Problems 14 and 15, and use the circular flow model to illustrate your answers
Boeing Bets the House
Boeing is producing some components of its new 787 Dreamliner in Japan and is
assembling it in the United States Much of the first year’s production will be sold
to ANA (All Nippon Airways), a Japanese airline
Source: The New York Times, May 7, 2006
14 Explain how Boeing’s activities and its transactions affect U.S and Japanese
GDP
Goods and services produced within the United States are part of U.S GDP
Boeing’s decision to produce part of its new 787 airliner in Japan means that this
production is not produced within the United States and so it is not part of U.S