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CHAPTER 25: MEASURING AND DESCRIBING THE
AGGREGATE ECONOMY
Questions and Exercises
1. A stock concept is the amount of something at a given point in time. A flow
2. Consumption spending is the largest expenditure category of production for most
3. The wealth accounts is a balance sheet of an economy’s stock of assets and
4. a. If more same-sex couples decide to live together because they are allowed to
b. GDP would not change. There is a transfer of assets, not the creation of new
c. GDP would rise by the broker’s commission. While the transfer of assets does
not affect GDP, that transfer can be assumed to increase both the seller’s and
d. GDP would not change. There is a transfer of income from taxpayers to
e. GDP would not change. The increase or decrease in the value of the stock market
f. GDP does not change when the person gets the job, GDP does not rise. GDP rises
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
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5. If you add up all transactions in an economy, you will include intermediate goods
6. The aggregate value added at each stage of production is, by definition, precisely
7. a. GDP is the sum of the value added by the three firms: $550 + $1,850 + $950 =
b. A 10 percent value-added tax would generate: 0.10 × $3,350 = $335 of revenue.
c. A 10 percent income tax would generate the same $335 of revenue because total
d. A 10 percent sales tax would generate the same $335 of revenue because final
8. Transfer payments are not included in aggregate output so nothing would happen
9. NDP is preferable to GDP as the expression of a country’s domestic output
because NDP takes depreciation, a relevant cost of producing goods, into account.
10. It depends on whether net foreign factor income is positive or negative. GDP
measures output produced in a country, regardless of whether or not it was
produced by a citizen or U.S. company. GNP measures output produced by a
11. GDP = C + I + G + (X - M) = $500 + $185 + $195 + $4 = $884.
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12. Employee compensation is the largest component of national income for most
13. a. Aggregate output (GDP) = C + I + G + (X - M) = $700 + $500 + $300 + $275 =
Aggregate income = Employee compensation + rents + interest + profits: $1329 +
b Aggregate income is less than aggregate output. There are a number of
14. a. GDP = C + I + G + (X - M) = $370 + $80 + $43 + ($55 – $63) = $485.
b. Depreciation = Investment – Net investment = $80 - $72 = 8.
15. Profit is the income category that keeps output and income the same. Aggregate
16. In an economy that has a trade surplus, domestic production is higher than
17. It is difficult to compare GDP over time because prices change. That is, because
18. a. Real GDP = (Nominal GDP/GDP Deflator) × 100
For Year 1: ($18,000/100) × 100 = $18,000 billion.
b. Since inflation was positive in every year, nominal GDP growth exceeded real
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c. It is impossible to say in which year society's welfare increased the most. GDP
19. Real Interest Rate Nominal Interest Rate Inflation
5 7 2
4 7 3
3 12 9
20. One must be careful when comparing real GDP per capita between countries. Two
reasons are: (1) GDP includes only market activities and it is likely that many
21. a. To the extent that a larger labor force contributed to higher market production,
measured GDP also rose.
b. The effect on welfare is uncertain. To the extent that value of the non-market
activities women were engaged in before entering the workforce is of equal or
22. a. Like all measures that focus on different aspects of what is being measured,
including GDP, the Genuine Progress Indicator is a subjective measure of the
b. GDP is a subjective measure of economic activity for a variety of reasons. One is
that it does not include non-market activities such as unpaid household
Questions from Alternative Perspectives
1. Feminist
a. While one reason may be that there is no direct measure of non-market activity
and therefore must be imputed indirectly feminist economists believe that the
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
b. Feminists believe that treating the unpaid work that women do within the home as
c. One would have to measure the market value (price) of the services provided by a
2. Religious
a. Measures of issues that relate to individual welfare, such as amount of crime,
b. This is a judgment question; judgments differ. Government expenditures on
3. Institutionalist
GDP is an institution in the sense that it is a social norm that was created in a specific
a. An Institutionalist will say GDP accounting shapes thought processes and social
values by legitimating some economic contributions (e.g. Tazers, a type of gun) and
de-legitimating others (e.g. homemaking). Because one activity is valued by society,
b. Individuals who are relatively more concerned with material goods and services
4. Austrian
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Austrians believe that government spending is for the most part unproductive and
therefore should not be included in GDP. Currently it is included as output valued at
5. Austrian
a. Austrians believe that the collection of statistics can be a private good, not a
b. Austrians believe that government bureaucrats whose job depends on having the
6. Radical
a. This is a judgment question; judgments differ. Most Radical economists believe
b. Radical economists support the Genuine Progress Indicator because it is more
Issues to Ponder
1. You can find consumption as a percent of GDP on the World Bank website. In
2015, the percentages were 67% for Mexico, 52.2% for Thailand, 60.1% for
Poland, 70.9% for Nigeria and 28.2% for Kuwait. People share basic needs such
2. a. Answers may differ. Five goods we buy frequently are newspapers, soda, gas,
shirts, and chicken.
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b. The answers you give will depend on goods chosen. The average annual increase
c. Over this same time the annual percentage increase in CPI was 3.3%.
3. If the United States introduces universal childcare, GDP should increase because
some childcare provided at home would then become a market transaction. The
4. GDP does not measure happiness nor does it measure economic welfare. GDP
5. The Simplicity Movement argues that after some point (after basic needs are met),
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© 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
