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5810 Measuring a Nation’s Income
82. You find that your paycheck for the year is higher this year than last. Does that mean that your
real income has increased? Explain carefully.
83. U.S. real GDP is substantially higher today than it was 60 years ago. What does this tell us, and
what does it not tell us, about the well-being of U.S. residents?
Measuring a Nation’s Income 5811
Problems
1. For the economy as a whole, how does income compare to expenditures? Explain.
2. In the circular flow diagram what are the three types of payments from firms to factors of
production? Is the sum of these payments greater than, less than, or equal to GDP?
5812 Measuring a Nation’s Income
Figure 23-2.
3. Refer to Figure 23-2. Identify the location for markets for factors of production and markets for
goods and services.
4. Refer to Figure 23-2. Identify the location of firms and households.
Measuring a Nation’s Income 5813
5. Refer to Figure 23-2. List the locations associated with the flow of inputs and outputs.
6. Define gross domestic product.
7. Define GDP. Remember to be specific about what it includes.
8. GDP excludes most of two types of production. List one.
5814 Measuring a Nation’s Income
9. Are sales of used goods included in GDP? Explain why or why not. Hint: Remember how GDP is
defined.
10. Alexandria, a British citizen, owns and manages a fish and chips shop in Washington, D.C.
She buys fresh food produced by U.S. workers, pays utilities to a U.S. company, and employs
only U.S. citizens. What part, if any, of the restaurant’s production is included in U.S. GDP?
What part, if any, of the restaurant’s production is included in U.S. GNP?
11. A farmer sells sugar to a candy producer for $150. If the producer uses this sugar to make candy
that sells for $200, what is the total contribution to GDP from these transactions?
Measuring a Nation’s Income 5815
12. How frequently is U.S. GDP reported? Is GDP adjusted for seasonality?
13. Explain how GNP differs from GDP.
14. List the four components of GDP.
5816 Measuring a Nation’s Income
15. What are exports, and how are they different from imports?
16. Identify the largest and smallest components of GDP.
17. Which component of GDP includes spending on new structures and equipment?
Measuring a Nation’s Income 5817
18. What are transfer payments, and how do they affect the calculation of GDP?
19. Consumption is $5.5 trillion, investment is $1 trillion, government expenditures are $1.5 trillion,
transfer payments are $.5 trillion, exports are $.75 trillion and imports are $1.25 trillion. What is
GDP?
20. Consumption is $7 trillion, investment is $1.5 trillion, government expenditures are $2 trillion,
government transfer payments are $1 trillion, exports are $1.50 trillion and imports are $1.25 trillion.
What is GDP?
5818 Measuring a Nation’s Income
21. Calculate GDP for a country with investment of $2 trillion, government purchases of $3 trillion,
capital depreciation of $1.5 trillion, consumption of $10 trillion, exports of $3.4 trillion, and imports
of $3.9 trillion.
22. Calculate GDP for an economy with exports of $5 trillion, investment of $1.5 trillion, consumption
spending of $11 trillion, imports of $6 trillion, and government purchases of $3 trillion.
23. What three types of goods are included in investment spending?
Measuring a Nation’s Income 5819
24. Last quarter Newton computers produced 3,000 computers. Two thousand of these computers
were sold to households, 750 were sold to businesses, and 250 were added to Newton’s inventory.
How many of the computers should have been included in last quarter’s GDP?
25. Identify which of the following are included in the government purchases component of GDP.the
salary paid to a state court judge unemployment insurance benefits the payment made by the
federal government for a jet fighter social security payments a county builds a jail building
26. Foreign countries buy $1.2 trillion of U.S. goods and services. U.S. residents purchase $1.8 trillion
of foreign goods and services. What is net exports?
5820 Measuring a Nation’s Income
27. The U.S. buys $500 billion of goods and $250 billion of services from foreign countries. Foreign
countries buy $250 billion of goods and $300 billion of services from the U.S. What is net exports?
28. Java Hut, a U.S. coffee retailer, buys $10 million worth of coffee beans from Colombia. It also
pays $5 million for paper cups and utilities, all produced in the U.S. It sells the coffee it produces
using the above inputs to U.S. consumers for $50 million. Overall how do these expenditure affect
net exports? How do these expenditures effect U.S. consumption?
29. A U.S.-owned automobile factory uses $50 million worth of materials produced in the U.S. and
$10 million worth of material purchased from foreign countries to produce $100 million of
automobiles. $70 million worth of these automobiles are purchased by U.S. consumers, $25 million
are sold in foreign countries, and $5 million are added to inventory. How much of this production
is included in U.S. GDP? By how much do these transactions alone affect U.S. net exports?
Measuring a Nation’s Income 5821
30. Explain how real GDP differs from nominal GDP.
31. What measure of GDP shows the value of goods and services produced if we valued these good
and services at the prices that prevailed in some specific year in the past?
32. Write the formula for calculating a GDP deflator using only nominal and real GDP.
5822 Measuring a Nation’s Income
33. Write the formula for calculating a country’s inflation rate using the GDP deflator.
34. Calculate the inflation rate for a country where the GDP deflator rises from 120 to 165.
35. Nominal GDP is $15 trillion and real GDP is $10 trillion. What is the GDP deflator? Show your
work.
Measuring a Nation’s Income 5823
36. Nominal GDP is $12 trillion and real GDP is $15 trillion. What is the GDP deflator? Show your
work.
37. In 2012 a country had a real GDP $15.4 trillion and GDP deflator of 125. If that country’s GDP
deflator equals 115 in 2013, what is the rate of inflation in 2013?
38. In 2011 a country had a real GDP of $13.89 trillion and GDP deflator of 110. In 2012 it had a
nominal GDP of $17.8 trillion and real GDP of 14.24 trillion. What is the rate of inflation in 2012?
5824 Measuring a Nation’s Income
39. In 2010 a country had nominal GDP of 6 trillion euro and real GDP of 5 trillion euro. In 2011 it
had nominal GDP of 6.5 trillion euro and real GDP of 5.2 trillion euro. What was its inflation rate
in 2011? Show your work.
Table 23-11
The country of Batavia produces only chocolates and watches. Below is a table with recent
information on Batavia production and prices. The base year is 2009.
Prices and Quantities
Year
Price of A Box of
Chocolates
Boxes of
Chocolates
Price of Watches Quantity of
Watches
2008
$4
100
$50
10
2009
$5
90
$50
15
2010
$5
100
$60
15
2011
$6
80
$65
12
40. Refer to Table 23-11.
What was nominal GDP, real GDP, and the GDP deflator for 2008?
Measuring a Nation’s Income 5825
41. Refer to Table 23-11.
What was nominal GDP, real GDP, and the GDP deflator for 2009? Show your work.
42. Refer to Table 23-11.
What was nominal GDP, real GDP, and the GDP deflator for 2010? Show your work.
43. Refer to Table 23-11.
What was nominal GDP, real GDP, and the GDP deflator for 2011? Show your work.
5826 Measuring a Nation’s Income
44. Refer to Table 23-11.
What was the inflation rate for 2010? Show your work.
45. Refer to Table 23-11.
What was the inflation rate for 2011? Show your work.
Measuring a Nation’s Income 5827
Table 23-12
A country produces only ice cream and cake in the quantities and prices listed below. Use 2011
as the base year.
Year
Price of Ice
Cream
Quantity of Ice
Cream
Price of Cake
Quantity of Cake
2011
$2.00
200
$10
40
2012
$2.30
250
$14
50
2013
$2.75
280
$18
80
46. Refer to Table 23-12. Calculate real and nominal GDP for the year 2012.
47. Refer to Table 23-12. Calculate real and nominal GDP for the year 2013.
48. Refer to Table 23-12. Calculate the GDP deflator for 2012 and 2013.
5828 Measuring a Nation’s Income
49. Refer to Table 23-12. Calculate the rate of inflation for 2012.
50. Explain the pattern seen between GDP per person and quality of life measures such as life
expectancy, literacy, and Internet usage.
