Download What components of GDP (if any) would each of the following

1. What components of GDP (if any) would each of the following transactions affect? Explain.
a. A family buys a new refrigerator.
b. Aunt Jane buys a new house.
c. Ford sells a Thunderbird from its inventory.
d. You buy a pizza.
e. California repaves Highway 101.
f. Your parents buy a bottle of French wine.
g. Honda expands its factory in Marysville, Ohio.
2. GDP does not include the value of used goods that are resold. Why would including such
transactions make GDP a less informative measure of economic well-being?
3. If prices rise, people’s income from selling goods increases. The growth of real GDP ignores this
gain, however. Why, then, do economists prefer real GDP as a measure of economic well-being?
4. One day Barry the Barber, Inc., collects $400 for haircuts. Over this day, his equipment
depreciates in value by $50. Of the remaining $350, Barry sends $30 to the government in sales
taxes, takes home $220 in wages, and retains $100 in his business to add new equipment in the
future. From the $220 that Barry takes home, he pays $70 in income taxes. Based on this
information, compute Barry’s contribution to the following measures of income:
a. Gross Domestic Product.
b. Net national product.
c. National income.
d. Personal income.
e. Disposable personal income.
5. Suppose that the residents of Proteinland spend all of their incomes on ham, chicken, and roast
beef. In 2006, they buy 50 pounds of ham for $150, 35 pounds of chicken for $140, and 100
pounds of roast beef for $500. In 2007, they buy 35 pounds of ham for $140, 50 pounds of
chicken for $200, and 100 pounds of roast beef for $600.
a. Calculate the price of each meat in each year.
b. Using 2006 as the base year, calculate the CPI for each year.
c. What is the inflation rate for 2007?
6. Suppose that people consume only 3 goods, as shown in this table:
Tennis balls
Golf balls
Bottles of Gatorade
2006 price
$2
$4
$1
2006 quantity
100
100
200
2007 price
$2
$6
$2
2008 quantity
100
100
200
a. What is the percentage change in the price of each of the three goods?
b. Using a method similar to the consumer price index, compute the percentage change
in the overall price level.
c. If you were to learn that a bottle of Gatorade increased in size from 2006 and 2007,
should that information affect your calculation of the inflation rate? If so, how?
d. If you were to learn that Gatorade introduced new flavours in 2007, should that
information affect your calculation of the inflation rate? If so, how?
1.
a.
b.
c.
d.
e.
f.
g.
2.
3.
Consumption increases because a refrigerator is a good purchased by a household.
Investment increases because a house is an investment good.
Consumption increases because a car is a good purchased by a household, but investment decreases
because the car in Ford’s inventory had been counted as an investment good until it was sold.
Consumption increases because pizza is a good purchased by a household.
Government purchases increase because the government spent money to provide a good to the public.
Consumption increases because the bottle is a good purchased by a household, but net exports
decrease because the bottle was imported.
Investment increases because new structures and equipment were built.
If GDP included goods that are resold, it would be counting output of that particular year, plus sales of
goods produced in a previous year. It would double-count goods that were sold more than once and
would count goods in GDP for several years if they were produced in one year and resold in another year.
Economists ignore the rise in people's incomes that is caused by higher prices because although incomes
are higher, the prices of the goods and services that people buy are also higher. Therefore, they will not
necessarily be able to purchase more goods and services. For this reason, economists prefer to look at real
GDP instead of nominal GDP.
4.
a.
b.
c.
d.
a.
GDP equals the dollar amount Barry collects, which is $400.
NNP = GDP – depreciation = $400 − $50 = $350.
National income = NNP − sales taxes = $350 − $30 = $320.
Personal income = national income − retained earnings = $320 − $100 = $220.
Disposable personal income = personal income − personal income tax = $220 − $70 = $150.
5.
a. See the price of each good in each year in the following table:
Year Ham
2006
2007
b.
$3
$4
Chicken Roast Beef
$4
$4
$5
$6
If 2006 is the base year, the market basket used to compute the CPI is 50 pounds of ham, 35 pounds
of chicken, and 100 pounds of roast beef. We must now calculate the cost of the market basket in
each year:
2006: (50 x $3) + (35 x $4) + (100 x $5) = $790
2007: (50 x $4) + (35 x $4) + (100 x $6) = $940
Then, using 2006 as the base year, we can compute the CPI in each year:
2006: $790/$790 x 100 = 100
2007: $940/$790 x 100 = 119
c.
We can use the CPI to compute the inflation rate for 2007:
(119 − 100)/100 x 100% = 19%
6.
a.
b.
c.
d.
The percentage change in the price of tennis balls is (2 – 2)/2 × 100% = 0%.
The percentage change in the price of golf balls is (6 – 4)/4 × 100% = 50%.
The percentage change in the price of Gatorade is (2 – 1)/1 × 100% = 100%.
The cost of the market basket in 2006 is ($2 × 100) + ($4 × 100) + ($1 × 200) = $200 + $400 + $200
= $800. The cost of the market basket in 2007 is ($2 × 100) + ($6 × 100) + ($2 × 200) = $200 +
$600 + $400 = $1,200. The percentage change in the cost of the market basket from 2006 to 2007
is (1,200 – 800)/800 × 100% = 50%.
This would lower my estimation of the inflation rate because the value of a bottle of Gatorade is
now greater than before. The comparison should be made on a per-ounce basis.
More flavors enhance consumers’ well-being. Thus, this would be considered a change in quality
and would also lower my estimate of the inflation rate.