978-1259291814 Chapter 2 Solution Manual

Chapter 2: The U.S. Economy: A Global View

Solutions Manual

Learning Objectives for Chapter 2

After reading this chapter, you should know

LO 02-01. The relative size of the U.S. economy.

LO 02-02. How the U.S. output mix has changed over time.

LO 02-03. How the U.S. is able to produce so much output.

LO 02-04. How incomes are distributed in the United States and elsewhere.

Questions for Discussion

1. Americans already enjoy living standards that far exceed world averages. Do we have

enough? Should we even try to produce more? (LO 02-01)

Answer: As long as people want more than they have, scarcity exists. If we are interested in

increasing our standard of living, then we should consider producing more. Of course, one of

2. Why is per capita GDP so much higher in the United States than in Mexico? (LO 02-03)

3. Can we continue to produce more output every year? Is there a limit? (LO 02-03)

4. The U.S. farm population has shrunk by over 25 million people since 1900. Where did all the

people go? Why did they move? (LO 02-02)

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5. Is the relative decline in U.S. farming and manufacturing (Figure 2.2) a good thing or a bad

thing? (LO 02-02)

6. How many people are employed by your local or state government? What do they produce?

What is the opportunity cost of that output? (LO 02-01)

7. Where do growing companies like Google and Facebook get their employees? What were

those workers doing before? (LO 02-02)

8. Should the government try to equalize incomes more by raising taxes on the rich and giving

more money to the poor? How might such redistribution affect total output and growth?

(LO 02-04)

9. Why are incomes so much more unequal in poor nations than in rich ones? (LO 02-04)

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10. How might free markets help reduce global poverty? How might they impede that goal?

(LO 02-03)

Problems

1. In 2013 the world’s total output (real GDP) was roughly $73 trillion. What percent of this

total was produced

(a) By the three largest economies (World View, p. 31)?

(b) By the three smallest economies in that World View?

(c) How much larger is the U.S. economy than the Ethiopian economy? (LO 02-01)

Answers:

(a) 42.33%.

Feedback:

(a) In 2013 the U.S. produced $16.8 trillion, China produced $9.2 trillion and Japan produced

(b) In contrast, the smallest three economies, Haiti ($0.01 trillion), Ethiopia ($0.05 trillion)

(c) The size of the U.S. GDP is 336 (16.8 / 0.05) times larger than Ethiopia’s. This is partially

2. According to the World View on page 32, how does per capita GDP in the following

countries stack up against America’s (in percentage terms):

(a) Russia?

(b) China?

(c) Cuba? (LO 02-01)

Answers:

(a) 25.82%.

Feedback: Per capita GDP is an indicator of how much output the average person would get

if all output were divided up evenly among the population. Note, however, that even the per

(a) Russia’s GDP per capita is $13,860, while the U.S. GDP per capita is $53,670, so

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3. In 1950, America’s GDP per capita was approximately $15,000 (in today’s dollars). How

much higher in percentage terms is

(a) America’s GDP per capita in 2013 compared to its GDP in 1950?

(b) America’s 1950 GDP per capita compared to

(i) Cuba’s in 2013?

(ii) China’s in 2013? (LO 02-04)

Answers:

(a) 358%.

Feedback:

(a) America’s GDP per capita in 2013 is 358% ([53,670 / 15,000] × 100) of America’s GDP

4. (a) How much more output does the $18 trillion U.S. economy produce when GDP increases

by 1.0 percent?

(b) By how much does this increase the average (per capita) income if the population is 320

million? (LO 02-03

Answers:

5. According to Table 2.1 (p. 34), how fast does total output (GDP) have to grow in order to

raise per capita GDP in

(a) China?

(b) Ethiopia? (LO 02-01)

Answers:

Feedback:

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Per capita GDP is calculated as a nation’s total output divided by its total population. In all

nations, GDP must grow by more than the growth rate of the population in order for per

6. (a) If Haiti’s per capita GDP of roughly $810 were to DOUBLE every decade, what would

Haiti’s per capita GDP be in 50 years?

(b) What is U.S. per capita GDP in 2013 (World View, p. 32)? (LO 02-03)

Answers:

Feedback:

(a) If Haiti’s per capita GDP of roughly $810 were to double every decade for 50 years, it

7. U.S. real gross domestic product increased from $10 trillion in 2000 to $15 trillion in 2010.

During that same decade the share of manufactured goods (e.g., cars, appliances) fell from 16

percent to 12 percent. What was the dollar value of manufactured output

(a) In 2000?

(b) In 2010?

(c) By how much did manufacturing output change? (LO 02-02)

Answers:

(a) $1.6 trillion.

Feedback:

(a) $10 trillion × 16% = $1.6 trillion of manufactured output.

8. Using the data in Figure 2.3,

(a) Compute the average income of U.S. households.

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(b) If all incomes were equalized by government taxes and transfer payments, how much

would the average household in each income quintile gain (via transfers) or lose (via taxes)?

i. Highest fifth.

ii. Second fifth.

iii. Third fifth.

iv. Fourth fifth.

v. Lowest fifth.

(c) What is the implied tax rate (i.e., tax ÷ average income) on the highest quintile?

(LO 02-04)

Answers:

(a) $72,800.

(b) i. – $112,200.

Feedback:

(a) Sum of the average income for each income quintile divided by the total of five quintiles:

(b) i. The highest quintile (the highest fifth) would lose $112,200 ($72,800 – $185,000 =

(c) The implied tax rate is the tax divided by the average income within the quintile. For the

9. If 150 million workers produced America’s GDP in 2013 (World View, p. 31), how much

output did the average worker produce? (LO 02-03)

Feedback: According to the World View, the United States produced $16.8 trillion in output

10. How much more output (income) per year will have to be produced in the world just to

provide the 2.7 billion “severely” poor population with $1 more output per day? (LO 02-04)

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11. Using data from Table 2.1 (p. 34), illustrate on the following graphs real GDP and population

growth since 2000 (in the manner of Figure 2.1) for the nations indicated. (LO 02-01)

Answer:

The following graphs show the various growth rates for China, Canada, and Zimbabwe

from 2000 to 2010.

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12. Using data from the endpapers, illustrate on the graph below

(a) The federal government’s share of the total output.

(b) The state/local government’s share of total output. (LO 02-01

Answers:

…

Feedback:

(a) In order to determine the federal government’s share of the total output, simply divide the

(b) In order to determine the state/local government’s share of the total output, simply divide

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