Download Chapter 5 Production, Income and Employment

Chapter 5 Production, Income and Employment
Review Questions
2.
Since, by definition, private investment is the increase in the nation’s capital stock during
the year, if net investment (investment minus depreciation) is positive, then the capital
stock is growing. On the contrary, if net investment is negative, the capital stock will
shrink. The three components of private investment are business purchases of plant,
equipment, and software, new home construction, and changes in inventories.
4.
Nominal variables are measured over time in dollars, with no adjustment for the dollar’s
changing value. Real variables are adjusted for the dollar’s changing value. The problem
with using nominal variables to track the economy is that when prices are changing (so
the purchasing power of the dollar is changing) changes in a nominal variable will be
distorted by changes in prices. For example, nominal GDP might increase not because
production has increased, but just because prices have increased.
6.
The actual value of goods produced was no doubt greater than $8.8 trillion. The official
GDP figures do not adequately account for non-market production and production in the
underground economy.
8.
a.
b.
c.
d.
cyclical—caused by recession
structural—mismatch created by technological change
seasonal—caused by end of harvest
structural—geographic mismatch
10.
The economic cost of unemployment is the output we could have produced if the
unemployment rate were lower. The human costs include the psychic and physical
suffering of the unemployed and their families, as well as a disproportionate burden
borne by minorities, and especially teenage minorities.
12.
This is how much output the U.S. would have produced for all of 2003, if we maintained
for the whole year the rate of production that we experienced in the second quarter.
Problems and Exercises
2.
a. The $700 per month in imputed rent on the home and the $500 in imputed rent on the
condo are irrelevant to computing the change in GDP, because while these housing
units are changing hands, they are continuing to provide the same services as before.
Similarly, the sales price of the home and the condo do not affect GDP, since these
housing units were presumably produced (and counted in GDP) in some previous
year. The sales commission on the condo—6% of $200,000 = $12,000—is the value
of a currently produced service. Thus, GDP rises by $12,000.
b. Using the expenditure approach, GDP rises by $75 million—the value of final sales.
(Alternately, we could also use the factor payments approach, noting that the
intermediate goods cost of $10 million will create an equal amount of factor
payments elsewhere in the economy. GE’s profit is its revenue minus its costs, or $75
million – ($10 + $40 + $15) = $10 million. Finally, wages and salaries and interest
paid by GE total $40 + $15 = $55. Adding together all of these factor payments, we
have $10 + $10 + $55 = $75 million.)
c. As a result of your decision, you will buy $50 less in nachos for the next 9 months.
Assuming that nacho producers respond by cutting back production of nachos, GDP
will fall by $50  9 = $450. However, you also spend $200 on goods to make your
own nachos. Since you are not a firm, but a household, all of your purchases—
including the raw materials—are considered final consumption goods. Thus, the net
effect on GDP is –$450 + $200 = –$250.
d. The lottery winnings are a transfer payment by the government; they are not included
in GDP because nothing is produced. However, there is a $10,000 increase in GDP;
that is, a $25,000 increase in investment minus a $15,000 increase in imports.
e. GDP rises by the full value of the CDs produced, or $15  100,000 = $1,500,000.
(Two components of GDP are affected: exports increase by $15  10,000 =
$150,000; and investment increases by $15  90,000 = $1,350,000.)
4.
The unemployment rate would be (9.4 million + 2.25 million )/(137.7 million + 9.4
million) = 7.9%.
6.
You should explain to her that the money she spent showed up as part of consumption
spending, which caused consumption spending to overstate production in the U.S.
Therefore, the purchase price of the sweater was also added to imports, and imports were
then subtracted from GDP to offset the overstatement.
8. a.
b.
c.
d.
The unemployment rate = (2140/(2140 + 46,000)= 4.44%.
There are 48,140 people in Ziponia’s labor force.
There are 200 discouraged workers in Ziponia.
The missing 1800 citizens (= 60,000 – 9,000 – 600 – 60 – 46,000 – 2,140 – 200) are
not in the labor force. Perhaps they are retired, full time students, independently
wealthy, or stay-at-home parents.
e. 11,860 (including those under 16, and those over 16 who are either in the military
service, in hospitals, in prison, not working but who would take a job, or who are
referred to in part (d).)
Challenge Questions
2. The long run effect of government expenditures for security on real GDP depends on how
the expenditures are funded, and on how effective these expenditures are at preventing
future terrorist attacks.
If government expenditures for security are funded by taxes on businesses,
investment will fall, reducing real GDP in the long run. If, however, increased
government expenditures for security are funded by income taxes, for instance,
consumption will fall, but there may be no effect on investment spending, and, thus, no
effect on long run real GDP.
Additional government expenditures for security may make the U.S. a safe place to
conduct business, leading to more investment spending in the U.S. than otherwise would
have occurred. This could actually lead to higher real GDP in the long run.
Economic Applications Exercises
2.
a. The diagram shows this relationship. This relationship is particularly clear when we
look at economic data during and after recessions. Economic growth rate and the
unemployment rate are inversely related due to business cycle effects. For example,
during a recession unemployment rates rise while real GDP falls, and vice versa.
b. Recall from the circular flow of a market economy that households receive income
from selling resources (land, labor, and capital) to firms. GDP can be measured by
adding up all of the payments to households for land, labor, and capital. Thus when
real GDP increases, personal income will also increase, and when real GDP
decreases, so too will personal income.
c. As seen in the last diagram of the page, Index of Leading Economic Indicators
generally provides a strong indication of future turning points in the economy. While
each of the four recessions since 1980 were anticipated by declines in the Index of
Leading Economic Indicators, the Index also falsely indicated a recession in the mid1990s. The pattern of the Index of Leading Economic Indicators falling prior to
recessions is clearly revealed in the time period between 2000 and 2002. Currently
the Index and Real GDP are both growing on an annual basis, which bodes well for
the economic recovery.