PROBLEMS AND APPLICATIONS CHAPTER 23

1.
a. It influences the consumption component: a new refrigerator is bought by
households to meet their own needs.
b. It influences the investment component: a new house is one type of household
spending category.
c. It doesn't influence GDP: an old Victorian house a resold product and GDP
calculation don't quantify resold product.
d. It influences the consumption component: the household spends money on
service which is a personal hairstyle.
e. It doesn't influence GDP: an item in stock has already been estimated as an
investment component of GDP growth.
f. It influences the investment component: Ford does business to make a profit
within the manufacturer and company.
g. It influences the government expenditure component: the government spends
money to recruit laborers and offer support to repave Highway to people in
general.
h. It doesn't influence GDP: social security is transfer payment and transfer
payment isn't considered as a part of GDP.
i. It doesn't influence GDP: a bottle of French wine is purchased locally so the
consumption component of GDP will grow, yet it is created by foreigners so net
export will fall subsequently GDP stays unaltered.
j. It influences the investment component: new Honda’s factory structure has
expanded to make more profits in the future.

2.
 1970: GDP Deflator = 1200/3000 x 100 = $40
 1980: Nominal GDP = (5000 x 60)/ 100 = $3000
 1990: Real GDP = 6000/100 x 100 = $6000
 2000: cannot be caculated because it is the base year
 2010: Real GDP = 15000/200 x 100 = $7500
 2020: Nominal GDP = (10000 x 300)/ 100 = $30000
  2030: GDP Deflator = 50000/20000 x 100 = $250
3.

From the definition, the GDP refers to the market value of all final goods and
services produced in a country within a period of time. Hence, transferring
payment does not include in GDP because there was not any services or
production generated when the government transferred money to people.
Nevertheless, in the case of people used the money from the government
transferred to pay for their products or services, it will include in GDP.

4.

Used goods are already counted in the GDP caculation when they are sold for the
first time, thus the person who resells goods does not produce anything new and
creates no value to the economy. Hence, it would be less informative to double
count the used goods in the GDP again.

5.

a.

 Nominal GDP:
o 2020: (1x100 ) + (2x50 ) = $200
o 2021: (1x200 ) + (2 x100) = $400
o 2022: (2 x 200 ) + (4 x 100 ) = $800
 Real GDP: base year 2020
o 2020: (1x100) + (2x50) = $200
o 2021: (1x200) + (2x100) = $400
o 2022: (1 x200) + (2x100) = $400
 GDP deflator:
o 2020: 200/200 x 100 = $100
o 2021: 400/400 x 100 = $100
o 2022: 800/400 x 100 = $200

b.
  Percentage change in nominal GDP in 2021 = [(400 – 200)/200] × 100 =
100%
 Percentage change in nominal GDP in 2022 = [(800 – 400)/400] × 100 =
100%
 Percentage change in real GDP in 2021 = [(400 – 200)/200] × 100 = 100%
 Percentage change in real GDP in 2022 = [(400 – 400)/400] × 100 = 0%
 Percentage change in the GDP deflator in 2021 = [(100 – 100)/100] × 100
= 0%
 Percentage change in the GDP deflator in 2022 = [(200 – 100)/100] × 100
= 100%

Prices did not change from 2020 to 2021, hence the percentage change in the GDP
deflator is zero. Likewise, the output levels did not change from 2021 to 2022
which means the percentage change in real GDP is zero.

c. Economic well-being rose more in 2021 than in 2022 since real GDP rose in
2021 but not in 2022. In 2021, real GDP rose but prices did not while in 2022, real
GDP did not rise but prices did.

6.

a,b,c.

In year 1: Q = 3 bars, P = 4
In year 2: Q = 4 bars, P = 5
In year 3: Q = 5 bars, P = 6
 Nominal GDP
o Year 1: 4 x 3 = $12
o Year 2: 5 x 4 = $20
o Year 3: 6 x 5 = $30
 Real GDP: year base 1
o Year 1: 4 x 3 = $12
o Year 2: 4 x 4 = $16
o Year 3: 4 x 5 = $20
 GDP deflator of year 1:
o Year 1: 12/12 x 100 = $100
o Year 2: 20/16 x 100 = $125
 o Year 3: 30/20 x 100 = $150

d,e.
 % growth rate of GDP from year 2 to year 3: (20-16)/16 x 100 = 25%
 Inflation rate of GDP from year 2 to year 3: (150-125/125) x 100 = 20%

7.

a. Growth rate of nominal GDP between 1998 and 2018 = 100 x [(20,501/9,063) ^
(1/20) -1] = 4,17%

b. Growth rate of GDP deflator between 1998 and 2018 = 100 x [(110,41/75,3) ^
(1/20) -1] = 1,931%

c. Real GDP in 1998 measured in 2012 prices = 9,063/ 75,3 x 100 = 12035,8

d. Real GDP in 2018 measured in 2012 prices = 20,501/110,4 x 100 = 18569,7

e. Growth rate of real GDP between 1998 and 2018 = 100 x [(18569,7 /12035,8) ^
(1/20) -1] = 2,191%

f. 4,17 % > 2,191%

=> The growth rate nominal GDP was higher than the growth rate of real GDP.

9.

a. The GDP in this economy is 180$ which is the final output value because this
value already included the value of wheat and flour that went to the production of
bread. If we add all value of each production, they’re double counted.

b. Assuming there are no intermediate goods beyond those descried above:

 Wheat is the main production of make other outputs, so the value added of
wheat producer equals to 100$.
 We use wheat to make flour, so the value added of flour equal to its value
of 150$ minus the cost of production which is 100$. So the value added of
flour producer is 50$.
  Flour is the production to make output of bread, so the value added of
bread equals to its own value of 180$ minus the cost of production which is
150$. So, the value added of bread producer is 30$.

c..The total value added of the three producer equals to the add up of all the
additional value created the output of bread which is: 100$+50$+30$=180$.
Compare to the economy’s GDP, they are equal to each other hence this suggest
another way of calculating GDP.

10.

The economy is often assessed well-being through measures of real GDP. As one
can see from the table 3, the US real GDP per person is higher than the India one
which supposedly the economic well-being of the US is better than of the India.
However, India is a self-sufficient country – Indian manufactures and consumes
most goods by themselves, while GDP excludes the value of almost all activities
that takes place outside markets. Hence a lot of things that they consume are not
counted in the real GDP and is the reason why their data is lower than the US.
More importantly, this leads to misunderstanding about the fund of the difference
between these two nations’ economic well-being, when in fact the economic well-
being in India is actually greater than it appears on paper.

11.

a. The participation of women in the US labor force that has risen dramatically
since 1970 would increase the GDP because the output of the production will
likely to rise due to the fact that many more women participated in the US labor
force. As the production increases the GDP of the country will also rise.

b. If the time spent working at home and leisure are also considered measures of
wellbeing, it would further enhance the value of GDP. The GDP is divided into
four components includes consumption, investment, government purchases, and
net exports, however, working at home or taking leisure does not have market
value so it’s not considered as part of the GDP growth. The women worked for
the US companies, therefore, the national of well-being will become better as the
rising of women participation in the US labor force would aim to enhance the
growth of GDP. Within goods and services that women provided to the country, it
will increase the growth of GDP. Hence, the salary of women expects to climb
and the women enjoy a higher income of their salary to satisfy their well-being in
their lifetime.

c. The other measures of wellbeing associated with female participation are the
number of children per woman and the marriage age of women. Yes, it would be
practical to construct a measure that involves these aspects. The reason is that
number of children would reduce female participation as they would have greater
liability at home. Similarly, early marriage age would also reduce female
participation rate as they might be less educated.
However, considering time spent at home and leisure hours are not good measures
of economic wellbeing as they reflect the direct production of goods in an
economy. Thus these measures would exaggerate the value of GDP and might be
misleading.

12.
a. The money collected from the haircut is the GDP: $400
b. Net national product is the difference between the contribution towards the
GDP and depreciation. NNP = contribution to GDP – Depriciation = $400 - $50 =
$350
c. The national income includes the total income earned by the residents of the
country. The contribution to national income is same as the NNP = $350
d. Personal income is the difference between national income and retained
earnings.
Personal income = National income – Retained earnings = $350 - $100 - $30 =
$220
e. Disposable personal income is the difference between the personal income and
personal tax.
Disposable personal income = Personal income – Personal tax = $220 - $70 =
$150