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ECON 2020—Macroeconomics
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Question 1: Define net exports. Explain how the United States’ exports and imports each affect
domestic production.
Answer: Net exports are a country’s exports of goods and services less its imports of goods and
services. The United States’ exports are as much a part of the nation’s production as are the
expenditures of its own consumers on goods and services made in the United States. Therefore,
the United States’ exports must be counted as part of GDP. On the other hand, imports, being
produced in foreign countries, are part of those countries’ GDPs. When Americans buy imports,
these expenditures must be subtracted from the United States’ GDP, for these expenditures are
not made on the United States’ production.
Question 2: Why do economists include only final goods in measuring GDP for a particular
year? Why don’t they include the value of stocks and bonds sold? Why don’t they include the
value of used furniture bought and sold?
Answer: The dollar value of final goods includes the dollar value of intermediate goods. If
intermediate goods were counted, then multiple counting would occur. The value of steel
(intermediate good) used in autos is included in the price of the auto (the final product).
This value is not included in GDP because such sales and purchases simply transfer the
ownership of existing assets; such sales and purchases are not themselves (economic) investment
and thus should not be counted as production of final goods and services.
Used furniture was produced in some previous year; it was counted as GDP then. Its
resale does not measure new production.
Question 3. Why is economic growth important? Why could the difference between a 2.5 percent
and a 3.0 percent annual growth rate make a great difference over several decades?
Answer: Economic growth means a higher standard of living, provided population does not grow
even faster. And if it does, then economic growth is even more important to maintain the current
standard of living. Economic growth allows the lessening of poverty even without an outright
redistribution of wealth.
If population is growing at 2.5 percent a year—and it is in some of the poorest nations—
then a 2.5 percent growth rate of real GDP means no change in living standards. A 3.0 percent
growth rate means a gradual rise in living standards. For a wealthy nation, such as the United
States, with a GDP in the neighborhood of $10 trillion, the 0.5 percentage point difference between
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ECON 2020—Macroeconomics
2.5 and 3.0 percent amounts to $50 billion a year, or more than $150 per person per year.
Using the “Rule of 70,” it would take 28 years for output to double with a 2.5 percent
growth rate, and just over 23 years with 3.0 percent growth.
Question 4. What are the four phases of the business cycle? How long do business cycles last?
How do seasonal variations and long-term trends complicate measurement of the business cycle?
Why does the business cycle affect output and employment in capital goods and consumer durable
goods industries more severely than in industries producing nondurables?
Answer: The four phases of a typical business cycle, starting at the bottom, are trough, recovery,
peak, and recession. As seen in Table 7.2, the length of a complete cycle varies from about 2 to 3
years to as long as 15 years.
There is a pre-Christmas spurt in production and sales and a January slackening. This
normal seasonal variation does not signal boom or recession. From decade to decade, the longterm trend (the secular trend) of the U.S. economy has been upward. A period of no GDP growth
thus does not mean all is normal, but that the economy is operating below its trend growth of
output.
Because capital goods and durable goods last, purchases can be postponed. This may
happen when a recession is forecast. Capital and durable goods industries therefore suffer large
output declines during recessions. In contrast, consumers cannot long postpone the buying of
nondurables such as food; therefore, recessions only slightly reduce non-durable output. In
addition, capital and durable goods expenditures tend to be “lumpy.” Usually, a large expenditure
is needed to purchase them, and this shrinks to zero after purchase is made.
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