320 chapter 2
*Which type of expenditure* Apple builds a computer to be sold next year
A computer built to be sold next year counts as investment. In particular, it counts as inventory investment since it is produced in one year and sold in a later year.
*Which type of expenditure* Apple sells a computer to Paris Hilton
A computer sold to Paris Hilton counts as consumption because it is sold to a private individual.
*Which type of expenditure* Apple sells a computer to a bakery in Paris, France
A computer sold to a bakery in France counts as an export because it is sold to a foreign firm.
*Which type of expenditure* Apple sells a computer to a public school in Paris, Kentucky.
A computer sold to a public school counts as government purchases because public schools are part of the government.
*Which type of expenditure* Apple sells a computer to an accounting firm in Paris, Illinois
A computer sold to an accounting firm counts as investment because it is a capital good sold to a private firm.
What does GDP Measure? How can it measure two things at once?
GDP measures the total income earned from the production of final goods and services in the economy, and it measures the total expenditure on final goods and services in the economy. GDP can measure both at once because, as a matter of accounting, the total expenditure of buyers must equal the total income of sellers. As the circular flow diagram in the text illustrates, these are equivalent ways of measuring the flow of dollars in the economy.
Decide whether GDP would increase or decrease: Fathers around the country reduce their worksheets to spend more time with their children
Measured real GDP falls because fathers spend less time producing market goods and services. The fathers are, however, providing more unmeasured child-rearing services. The well-being of the average person may rise if the fathers and children sufficiently benefit from the extra time they spend together.
Decide whether GDP would increase or decrease: A hurricane in Florida forces Disney World to shut down for a month.
Real GDP falls because Disney World does not produce any services while it is closed. This corresponds to a decrease in economic well-being because the income of workers and shareholders of Disney World falls (the income side of the national accounts), and people's consumption of Disney World falls (the expenditure side of the national accounts).
Decide whether GDP would increase or decrease: Firms throughout the economy experience falling demand, causing them to layoff workers.
Real GDP falls because the firms that lay off workers produce less. This decreases economic well-being because workers' incomes fall, and there are fewer goods for people to consume.
Decide whether GDP would increase or decrease: INcreased hostility between unions and management sparks a rash of strikes
Real GDP falls because, with fewer workers on the job, firms produce less. The resulting lower income and consumption leads to a fall in economic well-being.
Decide whether GDP would increase or decrease: Congress passes new environment laws that prohibit firms from using production methods that emit large quantities of pollution
Real GDP is likely to fall, as firms shift toward production methods that produce fewer goods but emit less pollution. Economic well-being, however, may rise. The economy now produces less measured output but more clean air. Clean air is not a market good and thus does not show up in measured GDP, but it is nevertheless a good that people value.
Decide whether GDP would increase or decrease: More high school students drop out of school to take jobs mowing lawns
Real GDP rises because the high school students go from an activity in which they are not producing market goods and services to one in which they are. Economic well-being, however, may decrease. In ideal national accounts, attending school would show up as investment because it presumably increases the future productivity of the worker. Actual national accounts do not measure this type of investment. Note also that future GDP may be lower than it would be if the students stayed in school since the future workforce would be less educated.
Decide whether GDP would increase or decrease: The discovery of a new, easy-to-grow strain of wheat increases form harvests
Real GDP rises because the original capital and labor in farm production can now produce more wheat. This corresponds to an increase in the economic well-being of society since people can now consume more wheat or some of the capital and labor in farm production can be reallocated to producing other goods that society values.
How are citizens in a population categorized by economists?
The BLS classifies each person into one of the following three categories: employed, unemployed, or not in the labor force.
What does the consumer price index measure? GDP deflator? How does each differ?
The consumer price index (CPI) measures the overall level of prices in the economy. It tells us the price of a fixed basket of goods relative to the price of the same basket in the base year. The GDP deflator is the ratio of nominal GDP to real GDP in a given year. The measures differ on three dimensions. First, the GDP deflator measures the prices of all goods and services produced, whereas the CPI measures only prices of goods and services bought by consumers. Second, the GDP deflator includes only domestically produced goods, whereas the CPI includes domestic and imported goods bought by consumers. Third, the CPI is a Laspeyres index that has a fixed basket of goods over time, whereas the GDP deflator is a Paasche index that has prices fixed over time. In practice, the two indexes tend to move together and do not often diverge
What are the four components of GDP? Give an example for each.
The four components of GDP are consumption, investment, government purchases, and net exports. The consumption category of GDP consists of household expenditures on new final goods and services, such as the purchase of a new television. The investment category of GDP consists of business fixed investment, residential fixed investment, and inventory investment. When a business buys new equipment, this counts as investment. Government purchases consists of purchases of new final goods and services by federal, state, and local governments, such as payments for new military equipment. Net exports measures the value of goods and services sold to other countries minus the value of goods and services foreigners sell to us. When the United States sells corn to foreign countries, it adds to the net export category of GDP.
C. Calculate total employment in two ways: as measured by the household survey and as measured by the establishment survey
The household survey estimates total employment by asking a sample of households about their employment status. The household survey would report 60 people employed. The establishment survey estimates total employment by asking a sample of businesses to report how many workers they are employing. In this case, the establishment survey would report 55 people employed because the 5 people with 2 jobs would be counted twice and the 10 people who run their own businesses would not be counted.
An economy has 100 people divided among the following groups: 25 have full-time jobs, 20 have one part-time job, 5 have two part-time jobs, 10 would like to work but are so discouraged they have given up looking, 10 are running their own businesses, 10 are retired and 10 are small children. a). Calculate the labor force and the labor force participation rate
The labor force includes full-time workers, part-time workers, those who run their own businesses, and those who do not have a job but are looking for one. The labor force consists of 70 people. The labor-force participation rate, which is the share of the adult population in the labor force, is (70/90) 100 = 77.8 percent.
A farmer grows a bushel of wheat and sells it to a miller for $1. The miller turns the wheat into flour and then sells the flour to a baker for $3. The baker uses the flour to make bread an dsells the bread to an engineer for $6. The engineer eats the bread. What is the value added by each person? What is the bread's contribution to GDP?
The value added by each person is equal to the value of the good produced minus the amount paid for the materials needed to make the good. In this case, the value added by the farmer is $1. The value added by the miller is $2 because the wheat is purchased for $1, and the flour is sold for $3. The value added by the baker is $3 because the flour is purchased for $3, and the bread is sold for $6. GDP is the total value added, or $1 + $2 + $3 = $6. Note that GDP equals the value of the final good (the bread).
B). Calculate the number of unemployed and the unemployment rate.
Unemployed workers are those who would like to work and are looking for jobs, so there are 10. The unemployment rate, which is the share of the labor force that is unemployed, is (10/70) 100 = 14.3 percent.
How do you solve for the unemployment rate?
Unemployment rate= Number of Unemployed/ Labor force *100
Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than as an employee). How does the marriage affect GDP? How do you think it should affect GDP?
When a woman marries her butler, GDP falls by the amount of the butler's salary. This happens because GDP measures total income from market activities and therefore does not include the value of any output produced in the home. If GDP truly measured the value of all goods and services, then the marriage would not affect GDP since the total amount of economic activity is unchanged. Actual GDP, however, is an imperfect measure of economic activity.
