SOLUTIONS TO TEXT PROBLEMS:
Quick Quizzes:
1. Gross domestic product measures two things at once: (1) the total income of
2. The production of a pound of caviar contributes more to GDP than the production
3. The four components of expenditure are: (1) consumption; (2) investment; (3)
4. Real GDP is the production of goods and services valued at constant prices.
5. Although GDP is not a perfect measure of well-being, policymakers should care
about it because a larger GDP means that a nation can a2ord better healthcare,
Chapter Quick Quiz
1. b
Questions for Review:
1. An economy’s income must equal its expenditure, because every transaction has
2. The production of a luxury car contributes more to GDP than the production of an
3. The contribution to GDP is $3, the market value of the bread, which is the nal
4. The sale of used records does not a2ect GDP at all because it involves no current
384
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 23/Measuring a Nation’s Income ❖ 385
5. The four components of GDP are consumption, such as the purchase of a DVD;
6. Economists use real GDP rather than nominal GDP to gauge economic well-being
7.
Year Nominal GDP Real GDP GDP De(ator
The percentage change in nominal GDP is (600 – 200)/200 x 100 = 200%. The
8. It is desirable for a country to have a large GDP because people could enjoy more
Problems and Applications
1. a. Consumption increases because a refrigerator is a good purchased by a
household.
b. Investment increases because a house is an investment good.
1. See completed table below with answers in bold.
Year
Real GDP
(in 2000 dollars)
Nominal GDP
(in current dollars)
GDP deflator
base year 2000
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 23/Measuring a Nation’s Income ❖ 386
1970 3,000 1,200 40
3. With transfer payments, nothing is produced, so there is no contribution to GDP.
4. If GDP included goods that are resold, it would be counting output of that
5. a. Calculating nominal GDP:
2016: ($1 per qt. of milk 100 qts. milk) + ($2 per qt. of honey 50 qts.
honey) = $200
Calculating real GDP (base year 2016):
2016: ($1 per qt. of milk 100 qts. milk) + ($2 per qt. of honey 50 qts.
honey) = $200
b. Calculating the percentage change in nominal GDP:
Percentage change in nominal GDP in 2017 = [($400 – $200)/$200] 100 =
100%.
Calculating the percentage change in real GDP:
Percentage change in real GDP in 2017 = [($400 – $200)/$200] 100 = 100%.
Calculating the percentage change in GDP de/ator:
0%.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 23/Measuring a Nation’s Income ❖ 387
2018. This means that the percentage change in real GDP is zero.
c. Economic well-being rose more in 2017 than in 2018, since real GDP rose in
6. a. Calculating Nominal GDP:
Year 1: (3 bars $4) = $12
b. Calculating Real GDP:
Year 1: (3 bars $4) = $12
c. Calculating the GDP de/ator:
Year 1: $12/$12 100 = 100
d. The growth rate of real GDP from Year 2 to Year 3 = (20 – 16)/16 100 = 25%
f. To calculate the growth rate of real GDP, we could simply calculate the
7.
Year Nominal
GDP
(billions)
GDP De(ator
(base year:
2009)
2014 $17,419 108.3
1994 $ 7,309 73.8
a. The growth rate of nominal GDP = 100 [($17,419/$7,309)0.05 – 1] = 4.4%
8. Many answers are possible.
9. a. GDP is the market value of the nal good sold, $180.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.
Chapter 23/Measuring a Nation’s Income ❖ 388
b. Value added for the farmer: $100.
c. Together, the value added for the three producers is $100 + $50 + $30 =
10. In countries like India, people produce and consume more food at home that is
11. a. The increased labor-force participation of women has increased GDP in the
b. If our measure of well-being included time spent working in the home and
c. Other aspects of well-being that are associated with the rise in women’s
12. a. GDP equals the dollar amount Barry collects, which is $400.
© 2018 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website,
in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise
on a password-protected website or school-approved learning management system for classroom use.