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Answer Key, Principles of Macroeconomics, 8e.
CHAPTER THREE
Answers to Test Your Understanding 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. Savings: $73.
(If personal income is $986, and personal income taxes are $227 then disposable
income (income after tax) must be $759 which is either consumed or saved. Since
consumption is $686, then savings must be $759 less $686, or $73.)
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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Answer Key, Principles of Macroeconomics, 8e.
9. See the following table:
Item
Carrots
2012
2013
Quantity Prices Nominal Quantity Prices
GDP
5 mill
$2
$10 mill 6 mill
$2.50
Tractors 2 000
Totals
50000
$100
mill
$110
mill
2 200
2013
Nominal Quantity 2012 Real
GDP
Prices GDP
$15 mill 6 mill
$2
$12
mill
52000 $114.4
2 200
50
$110
mill
000
mill
$129.4
$122
mill
mill
Value of real and nominal GDP in 2012 are the same: $110 million.
Value of Nominal GDP in 2013:
$129.4 million
Value of real GDP in 2013:
$122 miilion
10. Year 2013: 155 tonnes;
Year 2014: 160 tonnes;
(increase in labour productivity: 3.2% (actual increase of 5 divided by 155))
Answers to Connect Study Problems
1. Consumption
Gross investment
Government
Net Exports(130-118)
= GDP @ market prices
less depreciation
less indirect taxes
= NDP @ basic prices
+/− net foreign factor income
= NNP @ basic prices
430
126
198
+ 12
766
64
80
622
−22
600
a) GDP@ market prices = $766; b) NDP at basic prices = $622;
national product at basic prices (national income = $600.
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c) net
Answer Key, Principles of Macroeconomics, 8e.
2.
National income
Plus government transfer payments
Less undistributed corporate profits
Less corporate profit taxes
Less other income not paid out
= Personal income
Less personal income taxes
= Disposable income
a) Personal Income = $577;
600
90
28
45
40
577
140
437
b)
disposable Income = $437.
3.
Compensation of employees
Gross operating surplus
Gross mixed income
Taxes (net of subsidies) on production
Indirect taxes (net of subsidies)
= GDI @market prices
less depreciation
less indirect taxes
= NDI @ basic prices
+/− net foreign factor income
NNI @ basic prices (=national income)
425
261
123
41
97
947
152
97
698
17
681
a) GDI (@market prices) = $947; b) NDI (@ basic prices = $698;
c) (net) national income = $681
4.
2012
$500b
20 m
500/20 x 1000
= $25 000
GDP
Population
GDP per capita
2013
$525b (500 x 1.05)
20.4m (20 x 1.02)
525/20.4 x1000
= $25 735
5. a) See the following table:
Table 3.10 (Completed)
2013
Quantity Price Nominal Quantity Price
GDP
20m
$2.50 $50m
24m
$2.80
Protein
bars
Snowboards 100 000
Total
$280
$28m
105 000
$78m
$300
2014
Nominal Price Real
GDP
2013 GDP
$67.2m $2.50 $60m
$31.5m
$98.7m
3
$280
$28m
$88m
Answer Key, Principles of Macroeconomics, 8e.
b) 2013 Nominal GDP: $78 million; 2014 nominal GDP: $98.7 million;
2014 real GDP: $88 million
6. a) 2013: 15 (120/8); 2014:
b) 2014.
15.6 (126/8.07); 2015 15.2 (130/8.55)
7. See the following table:
Table 3.12 (Completed)
Expenditures
Incomes
Consumption
400
Compensation of employees
550
Gross investment
140
Gross operating surplus
100
Government spending
210
Gross mixed income
90
Net exports
100
Taxes less subsidies on production
50
Indirect taxes (net of subsidies)
60
Gross domestic product @ market 850
prices
Gross domestic income @ market 850
prices
Less depreciation
40
Less depreciation
40
Less indirect taxes (net of subsidies)
60
Less indirect taxes (net of subsidies)
60
Net domestic income at basic prices
750
+/- net foreign factor income
−50
(Net) national income
700
Add transfer payments
120
Less undistributed profit
35
Less corporate profit tax
50
Less other income items
25
Personal income
710
Less personal income taxes
210
Disposable income
500
Net domestic product at basic 750
prices
+/- net foreign factor income
−50
Net national product at basic 700
prices
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Answer Key, Principles of Macroeconomics, 8e.
8.
Savings =
100
Consumption =
400
See the following table:
TABLE 3.13 (Completed)
Expenditures
Consumption
Gross investment
Government spending
Net exports
939
309
449
-32
Gross domestic product @ market 1665
prices
Less depreciation
276
Less indirect taxes (net of subsidies)
98
Net domestic product at basic 1291
prices
+/- net foreign factor income
-32
Net national product at basic 1259
prices
5
Incomes
Compensation of employees
Gross operating surplus
Gross mixed income
Taxes less subsidies on production
Indirect taxes (net of subsidies)
Gross domestic income @ market
prices
Less depreciation
Less indirect taxes (net of subsidies)
Net domestic income at basic prices
+/- net foreign factor income
839
460
193
75
98
1665
276
98
1291
−32
(Net) national income
1259
Add transfer payments
Less undistributed profit
Less corporate profit tax
Less other income items
Personal income
Less personal income taxes
Disposable income
Savings =
Consumption =
235
66
55
105
1268
255
1013
74
939
Answer Key, Principles of Macroeconomics, 8e.
9. a)
See the following table:
TABLE 3.14 (Completed)
1
2
3
4
5
6
7
2013
Item
Qty
8
9
10
11
2014
Prices
Nominal
Year
GDP
Qty
2013
13
14
2015
Prices
Nominal
Prices
Real
Year
GDP
Year
GDP
2014
12
Qty
2013
Prices
Nominal
Prices
Real
Year
GDP
Year
GDP
2014
2013
Hot
dogs
50
2
100
55
2.40
132
2
110
58
2.50
145
2
116
DVDs
10
12
120
12
13
156
12
144
14
13.50
189
12
168
Farm
tractors
3
100
300
4
95
380
100
400
4
110
440
100
400
Parking
meters
4
50
200
60
240
50
200
5
70
350
50
250
Totals
4
720
908
854
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)
From columns 7 and 12:
2014 = $908;
c)
2015 = $1124
From columns 9 and 14:
2014 = $854;
2015 = $934
d)
2014 = 26.1%
2015 = 23.8%
(908 – 720)/720 x 100
(1124 – 908)/908 x 100
e)
2014 = 18.6%
2015 = 9.4%
(854 – 720)/720 x 100
(934 – 854)/854 x 100
f)
Real GDPs per capita:
2013 = $31 304;
2015 = $37 360
6
2014 = $35 583;
1124
934
Answer Key, Principles of Macroeconomics, 8e.
Since Year 2012 is the base year, we can use column 4’s $720 billion divided by
the population of 23 million (720 000 ÷ 23). For 2013, we use column 9’s 854
divided by 24 million and for 2014 column 14’s 934 divided by 25 million.
g)
Growth rate of real GDP per capita: 2014 = 13.7%;
2015 = 5.0%
2014’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 2014 to 2015
10. See the following table:
Table 3. 16 (Completed)
Expenditures
Consumption
Gross investment
Government spending
Net exports
120
160
1370
Incomes
Compensation of employees
Gross operating surplus
Gross mixed income
Taxes less subsidies on production
Indirect taxes (net of subsidies)
Gross domestic income @ market
prices
Less depreciation
Less indirect taxes (net of subsidies)
Net domestic income at basic prices
−20
+/- net foreign factor income
−20
1350
(Net) national income
1350
Add transfer payments
Less undistributed profit
Less corporate profit tax
Less other income items
Personal income
Less personal income taxes
Disposable income
Savings =
Consumption =
240
60
160
70
1300
260
1040
120
920
920
370
400
−40
Gross domestic product @ market
prices
Less depreciation
Less indirect taxes (net of subsidies)
Net domestic product at basic
prices
+/- net foreign factor income
1650
Net national product at basic prices
(Hint: Start with personal income and work your way down to find consumption (which is
the first expenditure item) or work up to find National Income.)
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860
370
170
90
160
1650
120
160
1370
Answer Key, Principles of Macroeconomics, 8e.
11
a)
Consumption
$720
(Disposable income minus personal saving)
b)
Net exports
−$40 (Exports minus imports)
c)
Gross investment
$170
d)
GDP @ market prices $1090 (Add C + Ig + G + XN)
e)
Gross mixed income $60
f)
NDP @ basic prices
$880 (GDP minus depreciation and indirect taxes)
g)
National income
$900
h)
Personal income
$980 (disposable income plus personal income tax)
(Net investment plus depreciation)
(GDP minus all other income items)
(NDP plus foreign factor income)
Answer to Comprehensive Problem
a) See the following figure:
Figure 3.5 (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).
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Answer Key, Principles of Macroeconomics, 8e.
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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