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AK Macroeconomics – Chapter 3
CHAPTER THREE
Answers to Self-Test Questions
1. Inventories must be rising. This is because the value of production is the same as total
income and if it exceeds total sales (aggregate expenditures), then some production
must be unsold.
2. No, consumption spending includes spending on imports as well.
No, the transfer of assets, including the purchase of stocks and bonds, is not investment.
3. a) C;
f) X;
b)
g)
I;
IM;
c)
h)
S;
X;
d)
i)
N;
G.
e)
I
4. Undistributed corporate profits: $21.
(If gross profits are $62, then net profits (profits after tax) must be $62 less corporation
taxes of $15, or $47. Net profits can either be distributed by corporations as dividends
or retained as undistributed profits. Since dividends are $26, then undistributed profits
must be $47 less $26, or $21.)
5. XN (net exports): $25.
We need to work our way backwards to get the answer. If national income is $600, then
adding back indirect taxes of $50 gives us $650 for NNP. Adding back depreciation of
$20 gives GNP of $670. Adding back net investment income by non-residents of $10
(it is negative and was therefore subtracted earlier) gives GDP of $680. Since the sum
of C + G and Ig is $655, the difference of $25 (680 minus 655) must be the value of
Xn.
6. National income: $552.
To find national income, we need to start at personal income of $589 and work
backwards. We need to add back undistributed profits, corporate profit taxes and other
income, which total $135, and then subtract government transfer payments of $172.
This gives national income of $552.
7. As housekeeping and child-minding activities become more and more a market
activity, GDP will increase. However, this does not necessarily mean that more is being
produced since these same activities were also done 40 years ago but mostly as nonmarket activities.
8. This could happen if prices fell. For instance if real GDP increased by, say, 5 percent
but prices dropped by 5% then nominal (reported) GDP would remain constant.
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AK Macroeconomics – Chapter 3
9. See the following table:
Item
Carrots
2009
2010
Quantity Prices Nominal Quantity Prices Nominal Quantity
GDP
GDP
5 mill
$2
$10 mill 6 mill
$2.50 $15 mill 6 mill
Tractors 2 000
50000
Totals
$100
mill
$110
mill
2 200
52000
$114.4
mill
$129.4
mill
2 200
Value of real and nominal GDP in 2009 are the same: $110 million.
Value of Nominal GDP in 2010:
$129.4 million
Value of real GDP in 2010:
$122 miilion
10. Year 2010: 155 tonnes;
Year 2011: 160 tonnes;
(increase in labour productivity: 3.2% (actual increase of 5 divided by 155))
Answers to Study Guide Questions
1. False: these are both real flows.
2. False: individuals earn incomes from selling their factor services.
3. False: income and money are different concepts and are rarely equal, except by
coincidence.
4. False: savings are equal to income minus consumption.
5. False: they flow from the government to the household (and business) sector.
6. True
7. True
8. True
9. True
10. False: non-market activities are excluded from GDP figures.
11.b
12.b
13.d
14.a
15.b
16.a
17.c
18.c
19. c
20. d
21. d
22. a
23. c
24. a
25. b
20
26. b
27. c
28. d
29. b
30. d
31. b
32 b
33. c
34. d
35. c
2010
2009
Real
Prices GDP
$2
$12
mill
50
$110
000
mill
$122
mill
AK Macroeconomics – Chapter 3
36A. Key Problem
a) See the following figure:
Figure 3.8 (completed)
b) Costs of production: $640. This is the total of: wages ($400), interest ($80) rent
($100), and profits ($ 60).
c) Total factor payments: $640.
d) Disposable income: $400. This is equal to $640 in factor payments less $360 paid
in taxes plus $120 in transfer payments.
e) Aggregate expenditures: $640. This is made up of: consumption ($300) less
imports ($80) plus government spending ($280), investment ($40) and exports
($100).
f) Total receipts: $640. Total receipts of all businesses are the same as aggregate
expenditures because what is spent by households, the government, other businesses
and foreigners is received by the business sector.
g) Total injections: $420; total leakages: $420. Total injections consist of:
investment ($40) plus exports ($100) and government spending ($280). Total
leakages are: savings ($100) plus imports ($80) plus net taxes of $240 ($360  $120).
h) The balance of trade (net exports): +$20. Net exports equals exports ($100) less
imports ($80).
i) Government’s budget: deficit of $40. The budget is net taxes ($240) minus
government spending ($280).
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AK Macroeconomics – Chapter 3
37A a) IM;
b) X;
c) C;
38A.
a) GDP = $766;
39A.
a) Personal Income = $577;
40A.
a) N and Ex
d) P and Ex
41A. a)
1
Item
Hot
Dogs
d) S;
b) NNP = $680;
e) G
c) National Income = $600.
b)
disposable Income = $437.
b) P and Ex
e) P and I
c) P and I
d) P and Ex
Table 3.10 (completed)
2
3
4
2009
5
6
7
2010
8
9
10
12
2011
12
120
12
13
156
12
3
Farm
tractors
Parking 4
meters
Totals
100
300
4
95
380
100 400 4
50
200
4
60
240
50
200 5
720
908
144 14 13.50
From columns 7 and 12:
2010 = $908;
c)
2011 = $1124
From columns 9 and 14:
2010 = $854;
d)
14
854
189
12
110
440
100 400
70
350
50
1124
Column 7 in the table is completed by multiplying columns 5 and 6 together.
Columns 8 and 13 are simply a repeat of column 3.
Column 9 is completed by multiplying columns 5 and 8 together.
Column 12 is determined by multiplying columns 10 and 11 together.
Column 14 is determined by multiplying columns 10 and 13 together.
b)
13
Qty Prices Nominal Qty Prices Nominal Prices Real Qty Prices Nominal Prices Real
Year GDP
Year GDP Year GDP
Year GDP Year GDP
2009
2010
2009
2011
2009
50 2
100 55 2.40
132
2 110 58 2.50
145
2 116
10
CDs
11
2010 = 26.1%
2011 = 23.8%
2011 = $934
(908 – 720)/720 x 100
(1124 – 908)/908 x 100
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168
250
934
AK Macroeconomics – Chapter 3
e)
f)
2010 = 18.6%
(854 – 720)/720 x 100
2011 = 9.4%
(934 – 854)/854 x 100
Real GDPs per capita:
2009 = $31 304;
2011 = $37 360
2010 = $35 583;
Since Year 2009 is the base year, we can use column 4’s $720 billion divided by
the population of 23 million (720 000 ÷ 23). For 2007, we use column 9’s 854
divided by 24 million and for 2008 column 14’s 934 divided by 25 million.
g)
Growth rate of real GDP per capita: 2010 = 13.7%;
2011 = 5.0%
2010’s real GDP per capita grew by 4279 (35 583 – 31 304). Dividing this 4279 by
31 304 and multiplying by 100 gives us the percentage growth rate. Real GDP per
capita grew by 1777 from 2007 to 2008
42A.
a) 2009:
b) 2010.
15 (120/8); 2010:
43A.
See following figure:
15.6 (126/8.07); 2011 15.2 (130/8.55)
Figure 3.8 (completed)
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AK Macroeconomics – Chapter 3
44A
Table 3.13 (completed)
C
Ig
G
XN
GDP
Net foreign factor income
GNP
Depreciation
NNP
Indirect Taxes
National Income
Transfer payments
Undistributed corporate profits
Corporate profits tax
Other income not paid out
Personal income
Personal income tax
Disposable income
Personal saving
400
140
210
100
850
– 50
800
40
760
60
700
120
35
50
25
710
210
500
100
45A.
GDP at market prices: $1446;
Net Domestic Income: $1100;
NNP at market prices: $1250;
Personal Income:
$1094;
GNP at market prices:
National Income:
NNP at factor costs:
Disposable Income:
$1435;
$1089;
$1089;
$842.
46A
Saving is that portion of income that isn’t spent. It could take the form of cash or
an RRSP or stocks and bonds. Investment is spending (by firms and government)
on new capital goods. Both are flow concepts.
47A
Economic growth is the increase in an economy’s real GDP per capita for one year
to the next. It can also be defined as the increase in an economy’s capacity to
produce from one year to the next.
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AK Macroeconomics – Chapter 3
48A
Table 3.15 (Completed)
.
C
Ig
G
Xn
350
90
340
20
GDP
800
Net foreign factor income 20
GNP
780
Depreciation
–70
NNP
710
Indirect tax
– 160
National income
550
49A.
Transfer payments
Undistributed corp. profits
Corporate profit taxes
Other income not paid out
+210
– 30
–80
–20
Personal Income
Personal income tax
Disposable Income
630
–230
400
Personal savings
50
Table 3.4 (completed)
Expenditures
Consumption
Gross Investment
Government Spending
Net Exports
Gross Domestic Product
+/– Net Foreign F Income
Gross National Product
Less Depreciation
Net National Product
Less Indirect Taxes
NNP at Factor Costs
Incomes
Wages
$530
Interest
$160
Gross Profits
$180
Farmers’ Income
$90
Self-employed Income
$60
Net Domestic Income
$1020
+/– Net Foreign f Income $–20
$ 800
$ 200
$ 400
$ –40
$1360
$–20
$1340
$ 120
$1220
$220
$1000
=
National Income $1000
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AK Macroeconomics – Chapter 3
Add Transfer Payments
$200
Less Undistributed Profits $40
Less Profits Tax
$60
Less Other Inc. Not Paid
$20
Personal Income
$1080
Less Personal Income Taxes $160
Disposable Income
$920
Savings =
Consumption =
$120
$800
50A. The expenditures approach measures the total value of production (GDP) by adding
up the amounts spent in the four sectors buying those goods. The four sectors are:
household (consumption), business (gross investment), government and international
(net exports). An adjustment is made for goods left unsold (change in inventories) by
adding it to gross investment.
The total income approach measures the amount paid to the various factor services (in
the form of wages, interest, profit, farmers’ income and self-employed income) in
producing GDP. It is the same as the total costs of production. To get the market value
of those products then the amount of indirect taxes and depreciation are added on.
51A. The stock of money is an amount which is measured at a particular moment in time.
For instance you have a certain amount of cash on your person at the moment. Income,
on the other hand, can only be measures over a period of time. For instance if you earn
an income of $200, it makes a big difference if this is your weekly income, daily
income or hourly income!
52A. In equilibrium the value of total leakages equals the value of total injections. It also
means that aggregate expenditures are equal to total income.
53A
There are many productive activities excluded from measured GDP because they are
non-market activities such as the value of housework, do-it-yourself production as well
as voluntary work. In addition, unreported activities from which income is received –
operating a day-care from your home, for instance – is excluded. In this last case it’s
not the activity that is illegal; it’s the non-reporting that’s illegal.
54A
a) Consumption 720;
d) national income 900;
b) GDP 1090;
e) personal income 980.
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c) GNP 1110;
AK Macroeconomics – Chapter 3
55A. Presently, expenditures on housing are considered investment, while automobile
purchases are treated as consumption expenditures. If automobile purchases were also
treated as investment, then the level of investment would rise and the level of
consumption expenditures would fall. GDP, national income and disposable income
are unaffected. However, since consumption has fallen, savings would rise by the same
amount as investment.
56A. Transfer payments are excluded from GDP because they do not represent payment
for goods and services produced in the current year.
57A. There are a number of reasons why high economic growth rates does not
necessarily mean that economic welfare has improved. First, there are many activities
that were previously non-market activities (child care, housework) that are now paid for
and included in GDP figures. Secondly, although we may have produced more goods
and services, these products may well be of a lower quality than previously, or worse
still, may be undesirable (or even possibly dangerous). Thirdly, if the growth rate is
measured the growth of real GDP rather than the growth of real GDP per capita, the
average person may be worse off rather than better off if the population growth exceeds
the GDP growth. In addition, people may be worse off if the cost of higher GDP means
a loss of leisure time. Finally, high economic growth rates could well result in higher
levels of pollution and resource depletion meaning that economic growth has come at
the cost of environmental degradation which means we are all worse off.
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