PROBLEMS AND APPLICATIONS
1. What components of GDP (if any) would each of the following transactions affect? Explain.
a. A family buys a new refrigerator.
b. Aunt Jane buys a new house.
c. Ford sells a Mustang from its inventory.
d. You buy a pizza.
e. California repaves Highway .
f. Your parents buy a bottle of French wine.
g. Honda expands its factory in Marysille Ohio.
2. 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.
3. 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?
4. Below are some data from the country of Sportsville.
b. Compute the percentage -change-in nominal GDP, real GDP, and the real GDP deflator in 2006 and 2007 from the preceding year. For each year, identify the variable that does not change. Explain in words why Of answer makes sense.
c. Did economic well-being rise more in 2006 or 2007? Explain.
5, Consider the following data on US. GDP.
a. What was the growth rate of nominal GDP between 1999 and 2000? (Note: The growth rate is the percentage change from one period to the next.)
b. What was the growth rate of the GDP deflator between 1999 and 2000?
c. What was real GDP in 1999 measured in 1996 prices?
d. What was real GDP in 2000 measured in 1996 prices? ‘
e. What was the growth rate of real GDP between 1999 and 2000?
f. Was the growth rate of nominal GDP higher or lower than the growth rate of real GDP? Explain.
6. If prices rise, people’s income from selling goods increases. The growth of real GDP ignores this gain, however. Why, then, do economists prefer real GDP as a measure of economic well-being?
7. Revised estimates of US. 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.doc.gov, the website of the US. Bureau of Economic Analysis. Discuss the recent changes in real and nominal G,DP and in the comportents of GDP.
8. 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
d. personal income
e. disposable personal income
9. A farmer grows wheat, which he sells to a miller for $100. The miller turns the wheat into flour, which he sells to a baker for $150. The baker turns the wheat into bread, which he sells to consumers for $180. 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. Assuming there are no intermediate goods beyond those described above, calculate the value added of each of the three producers.
‘hat is total value added of the in this economy? How does it compare to the GDP? Does this example suggest another way of calculating GDP?
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.
11. Until the early 1990s, the U.S. government emphasized GNP rather than GDP as a measure of economic well-being. Which measure should the government prefer if it cares about the total income of Americans? Which measure should it prefer if it cares about the total amount of economic activity occurring in the United States?
12. 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 could 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 in these aspects?