Exploring Macroeconomics Canadian

4th Edition by Sexton Fortura Kovacs

ISBN 0176531068 9780176531065
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FOR YOUR REVIEW ANSWER KEY

CHAPTER 6
MEASURING ECONOMIC PERFORMANCE
SECTION 6.1 NATIONAL INCOME ACCOUNTING: MEASURING
ECONOMIC PERFORMANCE
1. The following are included in Canadian GDP calculations:
a. cleaning services performed by a cleaning company
d. prescription drugs manufactured in Canada and sold at a local pharmacy
g. toxic waste cleanup performed by a local company
h. car parts manufactured in Canada for assembly of a car in Mexico
2. a. GDP is the value of all final goods and services produced within a country during a given period
of time (almost always one year).
b. To count intermediate goods as well as final goods and services would result in double counting
the value of some goods and services.
c. GDP is an attempt to measure domestic output; therefore, it must exclude goods and services
produced in other countries (even if those goods and services are produced by Canadians in
other countries).
d. The value of used goods was included in GDP when those goods were newly produced, so sales
of used goods are not counted as part of GDP (although any sales commissions on such sales
would be counted as newly produced services).

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e. Because such sales simply rearrange existing ownership claims, they are not counted because
they are not payments for newly produced goods or services (although any sales commissions
on such sales would be counted as newly produced services).
3. Gross domestic product measures the total value of production, which can be determined by either
the expenditure or the income approach. Both approaches will deliver an equivalent result since
every buyer must have a seller. The use of the expenditure approach to measure total production is
based on the understanding that the total value of what is bought (the expenditure of the buyer) will
be equal to the total value of what has been produced (considering only final goods and services).
Therefore, since everything that is bought must be purchased (thereby creating income for the
seller), the income approach is based on the understanding that the total value of factor payments
generated from production will be equal to the total value of what has been produced.
4. When Ford Motor Company buys tires to put on a vehicle that it manufactures, the tires are
considered to be intermediate goods. Only final goods, goods that are ready for their designated
ultimate use, are included in GDP statistics. Tires purchased by consumers to replace worn ones
represent final goods and are therefore included in GDP.

SECTION 6.2 THE EXPENDITURE APPROACH TO MEASURING GDP

5. a. Ministry of Transportation snow-clearing services: Government spending
b. Automobiles exported to Europe: Exports
c. Refrigerator: Consumption (consumer durables)
d. Newly constructed four-bedroom house: Investment
e. Restaurant meal: Consumption
f. Additions to inventory at a furniture store: Investment
g. Purchases of new computers by Statistics Canada: Government spending
h. New steel mill: Investment
6. Included in GDP calculated via the expenditure approach:
Consumption:
Consumer durables +$420 billion
Consumer semi-durables +$185 billion
Consumer nondurables +$275 billion
Consumer services +$600 billion
Investment:
Fixed investment +$120 billion
Inventory investment +$50 billion
Government Spending:
Government wages and salaries +$300 billion
Government purchase of
goods and services +$110 billion
Net Exports:
Exports +$ 40 billion
Imports –$ 80 billion
GDP: $2020 billion
7. Consumption $6500
Consumption of durable goods $1200
Consumption of
semi-durable goods $1100
Consumption of nondurable goods $1800
Consumption of services $2400

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 Answer Key

Investment $1400
Fixed investment $800
Inventory investment $600
Government expenditures on
goods and services $1600
Government transfer payments $500
Exports $500
Imports $650
Net exports –$150
GDP $9350

8. a. Sales of consumer durable goods tend to change more than consumer nondurable goods over
the course of a business cycle.
b. Consumer durables are like investments in two primary ways: Both provide a stream of services
into the future, in exchange for current expenditures and both are often financed by borrowing.
c. Fixed investments cannot be negative, because additions to the capital stock cannot be negative,
but inventory investments can be negative, because inventories can end a period of time lower
than they began.
d. Government transfer payments are not included in GDP because GDP measures the value of
newly produced goods and services, but transfer payments are not made in exchange for newly
produced goods or services.

9. Economic forecasters focus so much on consumption purchases and their determinants because
consumption purchases are by far the largest component of GDP (in Canada, nearly 60 percent); what
happens to consumption purchases is therefore crucial to what happens to GDP.

SECTION 6.3 THE INCOME APPROACH TO MEASURING GDP

10. Output creates income of equal value.
11.

Personal consumption expenditures $210

Gross investment 100
Government current purchases of goods and services 60
Exports 10
Imports (20)
GDP – Expenditure Approach 360
Compensation of employees $210
Corporation profits before taxes 62
Net mixed income 21
Indirect taxes (less subsidies) 35
Capital consumption allowances (depreciation) 32
GDP – Income Approach 360

SECTION 6.4 ISSUES WITH CALCULATING AN ACCURATE GDP

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Chapter 6

12. You cannot say that production has increased in Nowhereland from 2012 to 2013 by just looking at
nominal GDP. Production may have increased. However, nominal GDP could increase due to
inflation while production remains unchanged (as would be the case with a 10 percent inflation rate)
or even decreases (with a greater than 10 percent inflation rate).
13. Year Nominal GDP Real GDP
2009 ($720 billion/100) × 100 = $720 billion
2010 ($750 billion/102) × 100 = approximately $735 billion
2011 ($800 billion/110) × 100 = approximately $727 billion
2012 ($900 billion/114) × 100 = approximately $789 billion
2013 ($960 billion/120) × 100 = $800 billion
 $800 − $789 
The real economic growth rate for 2013 was 1.4 percent:    100 = 1.4%
 $789 

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 Answer Key

14.

Nominal GDP Real GDP

Year GDP Deflator (in billions) (in billions)
2009 90.9 $700 $770
2010 100 $800 $800
2011 125 $1000 $800
2012 140 $1400 $1000
2013 150 $1800 $1200

15. a.

Nominal GDP GDP Real GDP

Year (in millions of $) Deflator (in millions of $)
2008 3237.0 93.3 3469.5
2009 3156.4 97.2 3247.3
2010 2995.3 100 2995.3
2011 3376.2 103.2 3271.5
2012 3517.6 101.4 3469.0
2013 3797.3 102.6 3701.1

b. The base year is 2010 (identified by the GDP deflator value of 100). The significance of the year
2010 is that the conversion of nominal GDP values into real GDP involves the conversion of current
dollar output (nominal GDP) to constant dollar output (real GDP). The constant dollars that real GDP
is measured in is 2010 dollars.

c. Looking at the behaviour of real GDP between 2008–13, the following trends are apparent;
2008−10, real GDP (production) is falling; 2010–13, real GDP (production) is rising.

16. Year Real GDP per capita

1990 $4000 million/1.25 million = $3200
2000 $6750 million/1.6 million = approximately $4219
2010 $9000 million/1.8 million = $5000
Real GDP per capita increases over time.

SECTION 6.5 PROBLEMS WITH GDP AS A MEASURE OF ECONOMIC

WELFARE
17. a. Next year’s real GDP can exceed next year’s nominal GDP, but only if the price level falls. If
the price level rises, next year’s nominal GDP will exceed next year’s real GDP.
b. Yes. It will happen when the population growth rate exceeds the growth rate of real GDP.
c. Since only what is produced can be consumed, if we measured all sources of output accurately,
real per capita consumption possibilities could expand only when real per capita GDP grows.

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However, if, say, the underground (therefore, unmeasured ) economy grew fast enough, real
per capita consumption possibilities could increase despite measured decreases in real per
capita GDP.
d. Leisure is valuable but its value is not counted in GDP. So changing amounts of leisure over
time will not be accurately incorporated into GDP measures. Further, while a decrease in leisure
(an increase in labour market work) would increase measured GDP, people would be better off
only if their real after-tax wages were higher than the value of the leisure they gave up, which
is not always the case (especially when workers are fooled by inflation).
18. It is not enough to simply look at real GDP in the United States versus real GDP in Canada. The
United States has a much larger population than Canada, so it would be expected to have a higher
real GDP. To compare real GDP across countries, one should look at real GDP per capita. Real
GDP per capita is an imperfect measure of well-being but can give some idea of the standard of
living in these two countries.

19. Since nonmarket activities are not included in GDP, GDP would understate the true value of total
output more for a country with a relatively high level of nonmarket activities than for a country with a
smaller proportion of nonmarket activities, making countries with smaller shares of nonmarket
activities look more productive relative to countries with larger shares of nonmarket activities.

20. Neither pollution nor crime are included (as “bads” to be subtracted) in GDP calculations.
However, government expenditures for pollution and crime control are included in GDP as currently
produced goods and services.

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