Download Answers to Chapter 8 Problems

Answers to Chapter 8 Problems
8.1 Practice Problems
1. a. A purchase of used goods is excluded from GDP since it has already been counted when it was first sold, and so is part of none of the components
of GDP.
b. An addition to inventories is included in GDP and appears as part of the expenditure component investment.
c. A household purchase of a durable item is included in GDP and appears as part of the expenditure component consumption.
d. Interest on a private corporation's debt is included in GDP and appears as part of the income component corporate income, which incorporates all
corporations' payments of interest.
e. Spending on goods and services by a provincial government is included in GDP and appears as part of the expenditure component government
purchases.
f. A financial transaction is excluded from GDP because it merely shifts purchasing power from one economic participant to another and so is part of
none of the components of GDP.
g. A government transfer payment is excluded from GDP because it represents merely a shift of purchasing power from taxpayers to the transfer
payment recipient, and so is part of none of the components of GDP.
h. A foreigner's purchase of a Canadian-made good is included in GDP and appears as part of the expenditure component net exports.
2. a. Use the expenditure equation: GDP = C + I + G + (X - M). The expenditure-based estimate of GDP is $162 billion [= $85 billion + $35 billion +
43 billion + ($14 billion - 15 billion)].
b. Using the income approach GDP is calculated as the sum of: GDP = Wages and salaries + Corporate income + Proprietors' incomes and rents +
Indirect taxes + Depreciation. Note that depreciation can be calculated as the difference between gross and net investment: Depreciation = Gross
investment - Net investment. The income-based estimate of GDP is $194 billion [= $76 billion + $55 billion + $29 billion + $25 billion + ($35 billion
- $26 billion)].
c. The statistical discrepancy is $16 billion, found by taking the difference between the two GDP estimates ($32 billion = $194 billion - $162 billion)
and then dividing by two (= $32 billion / 2).
d. Macronia's GDP is halfway between the two estimates, or $178 billion (= $162 billion + $16 billion = $194 billion - $16 billion).
e. Macronia's depreciation is $9 billion, found by deducting net investment ($26 billion) from gross investment ($35 billion).
8.2 Practice Problems
1. a. Recall that GDP per capita equals GDP divided by the population. Per capita GDP in terms of the country's own dollars is $39,167 (= $235 billion
/ 6 million).
b. Per capita GDP in terms of US dollars is $21,933 [= ($235 billion / 6 million) x 0.56].
c. Per capita GDP in terms of PPP-adjusted US dollars is $23,500 [= ($235 billion / 6 million) x 0.60].
d. Because the PPP-adjusted US-dollar value of the country's currency is higher than the unadjusted US dollar value, prices in this country are lower
than in the United States. Once this difference in the price levels in the two countries is taken into account, the purchasing power of this country's
income, as shown by per capita GDP in PPP-adjusted US dollars, is higher than is shown by the unadjusted per capita GDP in US dollars.
2. a. In this case because incomes received by residents for their contributions to production elsewhere, which are added to GDP to derive GNI, are
greater than the incomes of non-residents for their contributions to production in the country, which are subtracted from GDP to derive GNI, the
country's GNI is higher than GDP and there is a net inflow of income into the country.
b. The country's residents benefit because their incomes exceed the production that takes place in the country.
Pg. 226
2. a. So that final and intermediate products are not double counted (which would lead to a total value of $6.35), only the extra worth of the salmon at
each stage of production is included in GDP. This extra worth is calculated by subtracting the cost of materials from the value of the business's
output. In the first stage of production, the value added by the fisherman is the value of the salmon sold to the food processor ($1.40). In the second
stage, the value added by the food processor is $0.80, and in the third stage, the value added by the retailer is $0.55.
b. The total value added in all three production stages ($2.75) therefore equals the value of the final product.
c. If final and intermediate products were double counted, the salmon's total value incorporated in GDP would be the sum of the value of the fish
when sold to the food processor by the fisher, its value when sold to the retailer by the food processor to the retailer, and then its value when sold by
the retailer to the consumer, or $6.35 (= $1.40 + $2.20 + $2.75).
3. a. A movie-theatre ticket is always a final product and never an intermediate product because it cannot be resold or processed further.
b. A roll of newsprint is never a final product and always an intermediate product because it must be processed further.
c. Electrical power is sometimes a final product and sometimes an intermediate product. It is a final product if used by a household and an
intermediate product if used by a business.
4. a. A household purchase of a service is included in GDP and appears as part of the expenditure component consumption.
b. Interest on government debt is excluded from GDP because it represents merely a shift of purchasing power from taxpayers to the bondholder and
so is part of none of the components of GDP.
c. A business's purchase of capital equipment is included in GDP and appears as part of the expenditure component investment.
d. A nonmarket activity is excluded from GDP because its value is not captured by official statistics and so is part of none of the components of
GDP.
e. A government transfer payment is excluded from GDP because it represents merely a shift of purchasing power from taxpayers to the transfer
payment recipient and so is part of none of the components of GDP.
f. A government's expenditure on goods and services is included in GDP and appears as part of the expenditure component government purchases.
g. An increase in business inventories is included in GDP and appears as part of the expenditure component investment.
h. A purchase of used goods is excluded from GDP since it has already been counted when it was first sold, and so is part of none of the components
of GDP.
i. A government subsidy is excluded from GDP because it represents merely a shift of purchasing power from taxpayers to the subsidy recipient and
so is part of none of the components of GDP.
j. A foreigner's purchase of a Canadian-made good is included in GDP and appears as part of the expenditure component net exports.
k. A financial transaction is excluded from GDP because it represents merely a shift of purchasing power and so is part of none of the components of
GDP.
l. A nonmarket activity is excluded from GDP because its value is not captured by official statistics and so is part of none of the components of GDP.
Answers to Chapter 9 Problems
9.1 Practice Problems
1. a. Using 2014 prices the 2014 shopping basket has a value of $25 [= ($2.50 x 5) + ($1.25 x 10)]. Using 2015 prices the 2014 shopping basket has a
value of $26.75 [= ($2.75 x 5) + ($1.30 x 10)].
b. With 2014 as the base year, the 2014 value of the index is 100 [= ($25 / $25) x 100]. The 2015 value of the index is 107 [= ($26.75 / $25) x 100].
c. The inflation rate between these two years is 7% [= ((107 - 100) / 100) x 100].
2.
Year
2012
2013
2014
2015
2016
Nominal GDP
(current $ billion)
[205.3]
234.3
245.9
258.7
[275.6]
GDP Deflator
97.458
[100.000]
101.340
[102.945]
105.438
Real GDP
(2013 $ billions)
210.7
[234.3]
[242.6]
251.3
261.4
Nominal GDP is found by multiplying real GDP by the GDP deflator expressed as a decimal. For 2012 it is $205.3 billion (= $210.7 billion x
0.97458). For 2016 it is $275.6 billion (= $261.4 billion x 1.05438). Because 2013 is the reference year the GDP deflator in 2013 is 100.000. The
GDP deflator's 2015 value is found by dividing nominal GDP by real GDP then multiplying by 100 or 102.945 [= ($258.7 billion / $251.3 billion) x
100]. Because 2013 is the reference year real GDP in 2013 has the same value as nominal GDP ($234.3 billion). Real GDP in 2014 is $242.6 billion
(= $245.9 billion / 1.01340). This is found by dividing the year's nominal GDP by the value of the GDP deflator expressed as a decimal.
9.2 Practice Problems
1. a. The labour force is the sum of the number of unemployed members of the labour force, workers with full-time jobs, part-time workers who wish to
have full-time jobs, and part-time workers who do not wish to have full-time jobs or 31.4 million (= 2.3 million + 21.4 million + 3.5 million + 4.2
million).
b. The labour force population is found by rearranging the formula used to derive the participation rate. This means dividing the labour force by the
participation rate expressed as a decimal or 49.1 million (= 31.4 million / 0.64).
c. The official unemployment rate is found by dividing the total number of unemployed members of the labour force by the labour force, then
multiplying by 100 or 7.3% [= (2.3 million / 31.4 million) x 100].
d. An unemployment rate that includes underemployment is found by summing the number of unemployed members of the labour force and the
number of part-time workers who wish to have full-time jobs, dividing this amount by the labour force, then multiplying by 100 or 18.5% {= [(2.3
million + 3.5 million) / 31.4 million] x 100}.
End of Chapter Problems
1. a. In 2014, Student A spends $4.50 (= 3 x $1.50) on hotdogs, $12 (= 16 x $0.75) on cola, $7 (= 7 x $1) on chocolate bars, $10.50 (= 3 x $3.50) on
magazines, and $6 (= 2 x $3) on movies, giving a shopping basket with a value of $40 (= $4.50 + $12 + $7 + $10.50 + $6). Item weights are 0.11 (=
$4.50 / $40) for hotdogs, 0.30 (= $12 / $40) for cola, 0.18 (= $7 / $40) for chocolate bars, 0.26 (= $10.50 / $40) for magazines, and 0.15 (= $6 / $40)
for movies.
b. The value of Student A's 2014 shopping basket using 2015 prices would be $42.00 [= (3 x $1.60) + (16 x $0.70) + (7 x $1) + (3 x $4.50) + (2 x
$2.75)]. The 2015 value of Student A's price index, using 2014 as the base year, is 105 [= ($42 / $40) x 100]. Given that 2014 is the base year, the
2014 value of the index is 100. The index has therefore changed by 5.0% {= [(105 - 100) / 100)] x 100} between 2014 and 2015.
2. a. $178.00 [= (4 x $22.00) + (50 x $1.80)]
b. $139.00 [= (4 x $16.00) + (50 x $1.50)]
c. 128 [= ($178.00 / $139.00) x 100]
d. The GDP deflator includes the quantities and prices of all of the products produced in the economy, whereas the consumer price index includes
only a small subset of products commonly bought by consumers. In calculating the GDP deflator, prices in both the current year and reference year
are weighted in terms of current-year quantities. In contrast, when calculating the consumer price index, prices in both the current year and base year
are weighted in terms of base-year quantities.
3.
Year
Nominal GDP
(current $ billion)
GDP Deflator
Real GDP
(2014 $ billions)
2012
[837.5]
91.691
913.4
2013
982.4
98.923
[993.1]
2014
1,152.9
[100.000]
[1,152.9]
2015
1,373.8
110.187
[1,246.8]
2016
1,589.6
[120.598]
1,318.1
Nominal GDP is found by multiplying real GDP by the GDP deflator expressed as a decimal. For 2012 it is $837.5 billion (= $913.4 billion x
0.91691). Because 2014 is the reference year the GDP deflator is 100.000. The GDP deflator's 2016 value is found by dividing nominal GDP by real
GDP then multiplying by 100, or 120.598 [= ($1,589.6 billion / $1,318.1 billion) x 100]. Real GDP in 2013 is $993.1 billion (= $982.4 billion /
0.98923) and in 2015 is $1,246.8 (= $1,373.8 billion / 1.10187). These values are found by dividing the year's nominal GDP by the value of the GDP
deflator expressed as a decimal. Because 2014 is the reference year real GDP has the same value as nominal GDP ($1,152.9 billion).
4. a. The lawyer is unaffected by inflation. With costs and revenues both rising by the inflation rate, the lawyer's net income will also increase by the
same rate, leaving her real income constant.
b. Because his restaurant is heavily in debt, this individual will probably benefit from unexpected inflation. The real interest rate paid on his
outstanding debt is less than it would be in the absence of inflation.
c. With a COLA clause in her contract, this worker is unaffected by inflation, since her nominal wage automatically rises by the inflation rate.
d. This individual's income is only partially indexed, meaning that his nominal income does not rise as quickly as the inflation rate. Therefore, this
individual is harmed by inflation, due to the decline in his real income.
5. a. The real interest rate is 5% (= 9 - 4), and the desired real interest rate is 6% (= 9 - 3). Because the actual real interest rate is 1% less than was
anticipated, borrowers are better off and lenders are worse off.
b. The real interest rate is 8% (= 10 - 2), and the desired real interest rate is 6% (= 10 - 4). The actual real interest rate is therefore 2% more than was
anticipated, which means that borrowers are worse off and lenders are better off.
c. The real interest rate is 6% (= 8 - 2), and the desired real interest rate is 6% (= 8 - 2). There is no difference between the actual and desired real
interest rates, so that both borrowers and lenders are unaffected.
8. a. Because there is a mismatch between their skills and available jobs this person is structurally unemployed. They are included in the official
unemployment rate.
b. This person has given up looking for work so is classified as a discouraged worker. They are not included in the official unemployment rate.
c. This person is seasonally unemployed. Because the official unemployment rate referred to is the rate before seasonal adjustment they are included
in this rate.
d. This person is cyclically unemployed. They are included in the official unemployment rate.
e. This person is underemployed. Given their current part-time job they are not included in the official unemployment rate.
f. This person is frictionally unemployed and as long as he actively seeks employment is included in the official unemployment rate.
9. a. In 2014, the unemployment rate was 0.7% (= 7.2 - 6.5) above the assumed natural rate. According to Okun's Law, real output could have been
1.75% (= 0.7 x 2.5) higher if unemployment equalled the natural rate. Thus GDP in 2012 dollars could have been $27.0 billion (= $1,543.2 billion x
0.0175) higher.
b. In 2015, the unemployment rate was 1.8% (= 8.3 - 6.5) above the assumed natural rate. According to Okun's Law, real output could have been
4.5% (= 1.8 x 2.5) higher if unemployment equalled the natural rate. GDP in 2012 dollars could therefore have been $72.6 billion (= $1,612.8 billion
x 0.045) higher.