1. What components of GDP (if any) would each of the following transactions affect? What will happen to GDP? Explain. a. A family buys a new refrigerator.
Answer: Consumption increases because a refrigerator is a good purchased by a household. GDP increases.
b. Aunt Jane buys a new house.
Answer: Investment increases because a house is an investment good. GDP increases. c. Ford sells a Mustang from its inventory.
Answer: Consumption increases because a car is a good purchased by a household, but investment decreases because the car in Ford’s inventory had been counted as an investment good until it was sold. GDP is unaffected. d. You buy a pizza.
Answer: Consumption increases because pizza is a good purchased by a household. GDP increases.
e. California repaves Highway 101.
Answer: Government purchases increase because the government spent money to provide a good to the public. GDP increases.
f. Your parents buy a bottle of French win. GDP is unaffected. Answer: Consumption increases because the bottle is a good purchased by a household, but net exports decrease because the bottle was imported.
g. Honda expands its factory in Marysville, Ohio.
Answer: Investment increases because new structures and equipment were built. GDP increases.
2. As the chapter states, GDP does not include the value of used goods that are resold. Why would including such transactions make GDP a less informative measure of economic well-being? Answer: If GDP included goods that are resold, it would be counting output of that particular year, plus sales of goods produced in a previous year. It would double-count goods that were sold more than once and would count goods in GDP for several years if they were produced in one year and resold in another.
3. Consider that the total output for Micronesia’s economy consists of 4 apples and 6 oranges. If apples cost $1 each and oranges cost $0.50 each, what is the value of Micronesia’s GDP?
Answer: $7GDP = P1×Q1 + P2×Q2 = $1×4 + $0.5×6 = $4+$3 = $7
4. Assume that a rancher sells to McDonald's a quarter-pound of meat for $1 and that McDonald's sells you a hamburger made from that meat for $2. In this case, what value of the hamburger would be included in the GDP?
Answer: $2GDP includes only finished goods.
5. Assume that a tire company sells 4 tires to an automobile company for $400, another company sells a compact disc player for $500, and the automobile company puts all of these items in or on a car that it sells for $20,000. What is the value accounted in the country’s GDP?
Answer: $20,000GDP includes only finished goods.
6. Assume that apples cost $0.50 in 2002 and $1 in 2007, whereas oranges cost $1 in 2002 and $1.50 in 2007. 4 apples were produced in 2002 and 5 in 2007, whereas 3 oranges were produced in 2002 and 4 in 2007, Based on this information answer the following:
a. What is the real GDP (in 2002 prices) in 2007?
Answer: $6.5 GDP2007 = P1×Q1 + P2×Q2 = 0.5×5 + 1×4 = 2.5+4 = $6.5
b. What is the GDP deflator in 2007, using a base year of 2002?
Nominal GDP 2007 = 1×5+1.5×4 = 5+6 = $11
GDP Deflator = Nominal GDP2007/ real GDP2007 = $11/$6.5= 1.7
7. At what rate did the GDP deflator grow if nominal GDP grew by 5 percent and real GDP grew by 3 percent?
Answer: 2% %Δ GDP Deflator = %Δ nominal GDP - %Δ real GDP
% ΔGDP Deflator = 5% - 2% = 3%
8. If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657, investment is $741, and government purchases are $1,098, Calculate net exports.
Answer: -$31GDP = C + I + G + NX
$5,465 = $3,657 + $741 + $1,098 + NX
NX = -$31
9. If GDP (measured in billions of current dollars) is $5,465, consumption is $3,657, investment is $741, and net exports are –$1,910, How much are government purchases?