Chapter 20 Checkpoint

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21
GDP A Measure of Total Production and Income
CHECKPOINTS
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Checkpoint 21.1
Checkpoint 21.2
Checkpoint 21.3
Problem 1
Problem 1
Problem 1
Problem 2
Problem 2
Problem 2
Problem 3
In the News
In the news
Problem 4
In the News
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CHECKPOINT 21.1

• Practice Problem 1
• Classify each of the following items as a final
  good or an intermediate good and identify which
  is a component of consumption expenditure,
  investment, or government expenditure on goods
  and services.
• Banking services bought by a student.
• New cars bought by Hertz, the car rental firm
• Newsprint bought by USA Today from International
  Paper.
• The purchase of a new aircraft for the
  Vice-president
• New house bought by Beyoncé

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CHECKPOINT 21.1

• Solution
• The students banking service is a final service
  and part of consumption expenditure.
• Hertzs new cars are additions to capital, so
  they are part of investment and final goods.
• Newsprint is a component of the newspaper, so it
  is an immediate good.
• The purchase of a new aircraft for the
  Vice-president is a final good and is part of
  government expenditure.
• The new house is a final good and part of
  investment.

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CHECKPOINT 21.1

• Practice Problem 2
• The figure shows the flows of expenditure and
  income on Lotus Island.
• In 2008
• R was 10 billionW was 30 billionU was 12
  billionX was 15 billionZ was 3 billion.
• Calculate total expenditure and total income.

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CHECKPOINT 21.1

• Solution
• Total expenditure is the sum of red flows C, I,
  G, and NX.
• On the figureC is the flow WI is the flow XG
  is the flow UNX is the flow Z

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CHECKPOINT 21.1

• So total expenditure equals W X U Z.
• Total expenditure equals (30 15 12 3)
  billion, which is 60 billion.
• Total income is the blue flow, Q.
• But total income equals total expenditure, so
  total income is 60 billion.

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CHECKPOINT 21.1

• In the News
• U.S. economy grew slower in spring than
  previously reported
• Real GDP increased at an annual rate of 1.0
  percent in the second quarter of 2011.
  Investment, exports, consumption expenditure,
  and government expenditure increased faster than
  1.0 percent.
• Source BEA News Release, August 26, 2011
• Use the letters on the circular flow figure to
  indicate the flows in which the items in the news
  clip occur.
• How can GDP have increased by 1.0 percent if the
  other items in the news clip increased faster
  than 1.0 percent?

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CHECKPOINT 21.1

• Solution
• GDP is the sum of flows W, X, U, and Z.
• Investment is X,
• Consumption expenditure is W,
• Government expenditure is U, and
• Exports are part of Z.

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CHECKPOINT 21.1

• GDP C I G X M,
• so if C I G X grew faster than 1
  percent,
• then M must have grown faster than C I G
  X.

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CHECKPOINT 21.2

• Practice Problem 1
• The table shows some of the items in the U.S.
  National Income and Product Accounts in 2008.
• Use the expenditure approach to calculate U.S.
  GDP in 2008.

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CHECKPOINT 21.2

• Solution
• The expenditure approach sums the expenditure on
  final goods and services.
• That is, GDP C I G NX.
• In 2008
• GDP (10.0 2.1 2.9 ? 0.7) trillion
• GDP was 14.3 trillion.

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CHECKPOINT 21.2

• Practice Problem 2
• The table shows some of the items in the U.S.
  National Income and Product accounts in 2008.
• What was U.S. GDP as measured by the income
  approach in 2008?
• By how much did gross product and net product
  differ in 2008?

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CHECKPOINT 21.2

• Solution
• GDP as measured by the income approach equals GDP
  as measured by the expenditure approach plus the
  statistical discrepancy.
• The statistical discrepancy is zero, so U.S. GDP
  as measured by the income approach was 14.3
  trillion.

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CHECKPOINT 21.2

• Gross product minus net product equals
  depreciation, which was 1.9 trillion in 2008.

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CHECKPOINT 21.2

• Practice Problem 3
• The table shows some of the items in the U.S.
  National Income and Product Accounts in 2008.
• Calculate U.S. GNP and U.S. national income in
  2008.

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CHECKPOINT 21.2

• Solution
• GNP GDP Net factor income from abroad.
• In 2008, GNP (14.3 0.2) trillion, which was
  14.5 trillion.

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CHECKPOINT 21.2

• National income equals GNP ? Depreciation ?
  Statistical discrepancy.
• The statistical discrepancy is zero, so in 2008,
• National income equals(14.5 ? 1.9) trillion,
  which is 12.6 trillion.

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CHECKPOINT 21.2

• Practice Problem 4
• The table shows some data for an economy.
• If the base year is 2010, calculate the economys
  nominal GDP and real GDP in 2011.

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CHECKPOINT 21.3

• Solution
• Nominal GDP in 2011 at 2008 prices equals(160
  apples x 1.00) (220 oranges x 2.00), which
  equals 600.
• Real GDP in 2011 at 2010 prices equals(160
  apples x 0.50) (220 oranges x 0.25), which
  equals 135.

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CHECKPOINT 21.2

• In the news
• As consumers reduce their spending, inventories
  are rising
• The Commerce Department reported that sales of
  nondurable goods fell 0.6 percent, while sales of
  durable goods decreased 1.5 percent in August.
  Inventories of durable goods increased 1.4
  percent.
• Source Reuters, October 9, 2008
• Which component of GDP changed when (i) sales of
  non-durable goods fell, (ii) sales of durable
  goods decreased, and (iii) inventories of durable
  goods increased? Provide an example of each item
  of expenditure.

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CHECKPOINT 21.2

• Solution
• (i) Sales of nondurable goods such as
  strawberries are bought by households and are
  part of consumption expenditure, C.
• (ii) Sales of durable goods such as iPhones that
  are bought by households are part of consumption
  expenditure, C, and sales of durable goods such
  as tower cranes bought by firms are part of
  investment, I.
• (iii) An inventory of durable goods, such as the
  auto parts at a Ford plant, is part of
  investment, I.

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CHECKPOINT 21.3

• Practice Problem 1
• The United Nations Human Development Report gives
  the data for 2011 in Table 1.

• Other information suggests that
• tIn Canada and the United States, household
  production is similar and smaller than in China
  and Russia.
• The underground economy is largest in Russia and
  China and a similar proportion of these
  economies.
• Canadians and Americans enjoy more leisure hours
  than do the Chinese and Russians.

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CHECKPOINT 21.3

• In which pair (or pairs) of these four countries
  is it easiest to compare the standard of living?
• In which pair (or pairs) of these four countries
  is it most difficult to compare the standard of
  living? Why?

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CHECKPOINT 21.3

• Solution
• Two pairsCanada and the United States, and China
  and Russiaare easy to compare because household
  production, the underground economy, leisure
  hours, and the environment are similar in the
  countries in each pair.
• The most difficult comparison is Canada and the
  United States with either China or Russia.
• Household production and the underground economy
  narrow the differences, but leisure hours and the
  environment widen them.

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CHECKPOINT 21.3

• Practice Problem 2
• The UN reported the following real GDP per person
  in 2002 China 4,580 Russia 8,230 Canada
  29,480 and the United States 35,750.
• In Canada and the United States, household
  production is similar and smaller than in China
  and Russia.
• The underground economy is largest in Russia and
  China and a similar proportion of these
  economies.
• Canadians and Americans enjoy more leisure hours
  than do the Chinese and Russians.

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CHECKPOINT 21.3

• Do the differences in real GDP per person rank
  the standard of living in these four countries?
• What additional information would we need to be
  able to make an accurate assessment of the
  relative standard of living in these four
  countries?

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CHECKPOINT 21.3

• Solution
• Differences in real GDP per person probably
  correctly rank the standard of living in these
  four countries because where the gap is small
  (Canada and the United States), other factors are
  similar, and where other factors differ, the gaps
  are huge.
• We would need more detailed information on the
  value of household production, the underground
  economy, the value of leisure, and the value of
  environmental differences to make an accurate
  assessment of relative living standards.

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CHECKPOINT 21.3

• Practice Problem 3
• Economists look to expand GDP to include the
  quality of life
• Robert Kennedy, when seeking the Democratic
  presidential nomination 40 years ago, remarked
  that GDP measures everything except that which
  makes life worthwhile.
• Source The New York Times, September 1, 2008
• Which items did Robert Kennedy probably think
  were missing?

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CHECKPOINT 21.3

• Solution
• GDP measures production that is traded in
  markets. GDP does not include household
  production, leisure time, health and life
  expectancy, political freedom, and social
  justice.
• These items are probably the ones that Kennedy
  believed were missing from GDP as a measure of
  the quality of life.