Measurement

Consider a simple economy producing 2 goods: coffee and TVs. In 2014 the economy produced 2000 pounds of coffee and 10 TVs. In 2015 the economy produced 1000 pounds of coffee and 12 TVs. The price of one TV was $1,000 in both years while the price of coffee decreased from $6/pound in 2014 to $5/pound in 2015. Based on this information the percentage change in real GDP in chained prices benchmarked to 2015 is:

-16.5 Real GDP 2014 using 2014 prices = 2,000x6 + 10x1,000=22,000 Real GDP 2015 using 2014 prices = 1,000x6 + 12x1,000=18,000 Percentage change = (18,000-22,000)/22,000= -18% Real GDP 2014 using 2015 prices = 2,000x5 + 10x1,000=20,000 Real GDP 2015 using 2015 prices = 1,000x5 + 12x1,000=17,000 Percentage change = (17,000-20,000)/20,000= -15% Percentage change in real GDP in chained prices benchmarked to 2015 is the average of the two growth rates = (-18 -15)/2 = - 16.5%

A construction company produces a $200,000 house using $50,000 worth of wood and steel in addition to $50,000 of labor hours. The value added by the construction company is

150,000 -Pages 26. Value added is revenue generated by the producer minus the value of intermediate goods. The wood and steel are the intermediate goods.

This year a real estate agent helped you buy a house for $200,000 which was originally built in 1985. The agent's commission was $12,000. How will this transaction affect this year's GDP?

Consumption expenditures will increase by $12,000. GDP measures the market value of final goods and services produced in an economy over a certain period. Thus, the value of a house built earlier does not get counted in this year's GDP. The only new production is the service by the real estate agent who got paid a commission for that service.

What counts as investment?

Investment includes purchases of structures and equipment by businesses in addition to purchases of new homes. A computer for home counts as consumption.

When comparing GDP across countries, it is better to use comparisons based on common prices than simply on exchange rate conversions.

True Comparisons based on exchange rate adjustments alone tend to yield larger differences across countries than those adjusting for prices.

Suppose we compare GDP per person in Uganda and the United States in two ways: first using the exchange rate method and second using the relative price-based conversion as well. Then, Uganda appears to be richer under the relative price-based conversion than with the exchange rate conversion.

True Wages in poorer countries are usually lower than wages in rich countries. Thus, prices are lower in Uganda. This implies that adjusting by the ratio of U.S. to Ugandan prices will make Uganda's GDP appear larger than if using only an exchange rate adjustment.

Recently, the largest share of GDP is

consumption

Examples of capital?

machines at an automobile factory an automobile factory building a plant manager's computer NOT screws and bolts used for making the car (intermediate goods)

What does NOT increase U.S. GDP?

the U.S. government increasing social security payments Transfer payments do not increase GDP because nothing new is purchased. When the U.S. government purchases a tank from a U.S. company, this is a government purchase, which counts towards GDP. When the French government purchases a tank produced in America, this increases U.S. GDP as it is exported out of the country. Increasing funding for tax policy at a U.S. university is government-funded research, which also counts towards GDP.

Under national income accounting, GDP equals

the goods produced in the economy, the income produced in the economy, and the total purchases in the economy under national income accounting, production = expenditure = income