ECO 2301 - Summer 2022 - Measuring Output and Income HW

13. a. Real GDP per capita is measured by which equation? -Real GDP per Capita = Real GDP/Nominal GDP -Real GDP per Capita = Real GDP/Population -Real GDP per Capita = Real GDP/Investment -Real GDP per Capita = Real GDP/Inflation

Real GDP per Capita = Real GDP/Population

11. The major difference between nominal GDP and real GDP is -nominal GDP measures the value of output in current-year prices, while real GDP measures output using constant prices. -nominal GDP measures the value of output with current-year output levels, while real GDP measures output using constant output levels. -nominal GDP measures the value of output in constant prices, while real GDP measures output using current-year prices. -nominal GDP measures the value of output with constant output levels, while real GDP measures output using current-year output levels.

nominal GDP measures the value of output in current-year prices, while real GDP measures output using constant prices. Explanation: Nominal GDP is the value of goods and services (output) produced in an economy measured at current prices. Real GDP is the value of goods and services (output) produced in an economy measured using constant prices.

2. Determine whether each transaction below would be included in GDP, and if so, indicate which category it would fall under. Assume all goods and services are produced in the domestic country unless otherwise stated. b. Sam purchases shares of Apple stock. -not included in GDP -included in GDP under net exports -included in GDP under gross investment -included in GDP under consumption expenditures -included in GDP under government expenditures

not included in GDP Explanation: This is a financial transaction, so it is not included in GDP.

13. c. Real GDP per capita is used to measure changes in -standards of living. -population. -investment. -inflation.

standards of living. Explanation: Real GDP per capita is used to measure changes in standards of living. Real GDP per capita measures output per person and offers insight into the standards of living in an economy.

13. b. True or False: The country with a higher real GDP must have a higher real GDP per capita. -False -True

False Explanation: The country with a higher real GDP must have a higher real GDP per capita is a false statement. A country may have a higher real GDP, but if its population is also higher it may be the case that real GDP per capita is less even if real GDP is higher.

4. The table below shows the values for several different components of GDP. Composition of Gross Domestic Product Value (billions) Consumer durables $ 1,280.6 Consumer nondurables 2,604.2 Services 8,014.3 Business fixed investment 2,790.0 Residential fixed investment 552.0 Inventories 76.1 Exports 2,309.9 Imports 2,850.3 Government purchases 3,061.7 What is the value of total gross investment? Instructions: Round your answer to 1 decimal place.

$3,418.1 billion Explanation: Gross investment expenditures include the purchases of new investment by businesses, new residential housing, and inventories. To find the amount of gross investment expenditures, we add only these three line items together. Gross Investment = Business Fixed Investment + Residential Fixed Investment + Inventories Gross Investment = $2,790.0 + $552.0 + $76.1 = $3,418.1 billion

12. The following table shows hypothetical values for the real GDP and population for the United States, Japan, Brazil, and Germany in 2016. Complete the table by calculating the real GDP per capita for each country. Instructions: Enter your answers as a whole number. Real GDP and Population, 2016: Select Countries ($ millions) Country Real GDP Population Real GDP per Capita USA $14,059,255 287 $ ___ Japan 4,199,260 117 ___ Brazil 1,709,488 186 ___ Germany 2,958,902 77 ___

$48,987 35,891 9,191 38,427 Explanation: Real GDP per capita is the amount of total real GDP divided by the population. It is a measure of how much real GDP is produced per person on average. Real GDP per Capita = Real GDP/Population. To find the amount of real GDP per capita in the United States, using the values in the table, we take the real GDP in the United States of $14,059,255 (millions of dollars) and divide it by the population of 287 (million people). This means that real GDP = $14,059,255/287 = $48,987. To find the amount of real GDP per capita in Japan, using the values in the table, we take the real GDP in Japan of $4,199,260 (millions of dollars) and divide it by the population of 117 (million people). This means that real GDP = $4,199,260/117 = $35,891. To find the amount of real GDP per capita in Brazil, using the values in the table, we take the real GDP in Brazil of $1,709,488 (millions of dollars) and divide it by the population of 186 (million people). This means that real GDP = $1,709,488/186 = $9,191. Finally, to find the amount of real GDP per capita in Germany, using the values in the table, we take the real GDP in Germany of $2,958,902 (millions of dollars) and divide it by the population of 77 (million people). This means that real GDP = $2,958,902/77 = $38,427

14. The table below shows hypothetical values of nominal and real GDP for the United States between 2012 and 2016. Real GDP was computed using 2009 as the base year. Using the information in the table, compute the GDP price index for each year. Instructions: Round your answers to one decimal place. Calculating the GDP Price Index Using Nominal and Real GDP Year Nominal GDP Real GDP GDP Price Index 2012 $15,154 $15,154 ____ 2013 15,728 15,615 ____ 2014 16,310 15,865 ____ 2015 16,988 16,233 ____ 2016 17,623 16,594 _____

100 ± 0.1 100.7 ± 0.1 102.8 ± 0.1 104.6 ± 0.1 106.2 ± 0.1 Explanation: The GDP price index in a given year is found by taking nominal GDP in that year divided by real GDP in that year multiplied by 100. It gives an index number that can then be used to find the rate of change in prices. GDP Price Index = Nominal GDP/Real GDP × 100. To find the GDP price index in 2012, use nominal GDP in 2012 of $15,154 billion divided by real GDP in 2012 of $15,154 billion. The 2012 GDP price index = $15,154/$15,154 × 100 = 100.0. To find the GDP price index in 2013, use nominal GDP in 2013 of $15,728 billion divided by real GDP in 2013 of $15,615 billion. The 2013 GDP price index = $15,728/$15,615 × 100 = 100.7. To find the GDP price index in 2014, use nominal GDP in 2014 of $16,310 billion divided by real GDP in 2014 of $15,865 billion. The 2014 GDP price index = $16,310/$15,865 × 100 = 102.8. To find the GDP price index in 2015, use nominal GDP in 2015 of $16,988 billion divided by real GDP in 2015 of $16,233 billion. The 2015 GDP price index = $16,988/$16,233 × 100 = 104.6. To find the GDP price index in 2016, use nominal GDP in 2016 of $17,623 billion divided by real GDP in 2016 of $16,594 billion. The 2016 GDP price index = $17,623/$16,594 × 100 = 106.2.

8. Which of the following correctly describes GDP using the income approach? -GDP = Wages + Rents + Interest + Profits and Losses -GDP = National Income + Indirect Business Taxes + Depreciation + Net Foreign Factor Income -GDP = Consumption + Gross Investment + Net Exports + Government Purchases -GDP = Wages + Rents + Interest + Profits and Losses + National Income

GDP = National Income + Indirect Business Taxes + Depreciation + Net Foreign Factor Income Explanation: Because expenditures on goods and services have to equal the amount of income generated, GDP can also be found from the income approach. Using the income approach, we start with national income. National income adds up all of the wages, rents, interest, and profits and losses earned from our resources. Once we have national income, we add back in other sources of value that are taken out of our income or our international accounts. These are indirect business taxes, depreciation, and net foreign factor income. Therefore, from the income approach, GDP = National Income + Indirect Business Taxes + Depreciation + Net Foreign Factor Income.

15. Although GDP is likely the best measure of economic activity in the economy, one reason why GDP is considered to be an imperfect measure is because -GDP does not include the purchase of foreign goods. -GDP does not include the purchase of used goods. -GDP does not include the purchase of illegal goods. -GDP does not include the purchase of intermediate goods.

GDP does not include the purchase of illegal goods. Explanation: GDP, or gross domestic product, tells us the value of final goods and services produced in an economy. Although GDP is likely the best measure of a country's economic activity, it is not a perfect measure. Goods and services that are not bought and sold in a formal market are not included in GDP. Also, GDP does not capture activities in the underground economy. Those activities in the underground economy are illegal and/or unreported.

1. Determine whether each of the following examples would be included in Gross Domestic Product (GDP). d. When Joey had his birthday last week, his grandmother sent him a $100 bill that he could spend.

Joey's birthday gift of $100 would not be included in GDP Explanation: The gift Joey receives is just a transfer of income from one person to another and is not a purchase of a newly produced good or service. Therefore, the $100 would not be included in GDP

1. Determine whether each of the following examples would be included in Gross Domestic Product (GDP). a. When Judy went to the grocery store yesterday, she bought three pounds of potatoes.

Judy's purchase of potatoes would be included in GDP as a consumption expenditure Explanation: Because Judy is purchasing a newly produced final good and she is purchasing it for consumption, the transaction is included in GDP. Judy is an individual consumer; therefore, her purchase is recorded in the consumption expenditures portion of GDP

3. Which of the following expenditures is an example of a government purchase? -The United States Army buys a new armored tank from the Lima Army Tank Plant. -The city of Seattle spends $1 million to pay interest on bonds that it issued seven years ago. -The U.S. government writes a check to Rhonda for her Social Security payment. -Juan buys a new soccer ball with his tax refund.

The United States Army buys a new armored tank from the Lima Army Tank Plant. Explanation: Government purchases are expenditures on newly produced goods and services by federal, state, or local governments. When the U.S. Army buys a new armored tank, it represents the purchase of a new good by the federal government. Thus, it is included as a government purchase. The purchase of the soccer ball by Juan (a household) is a consumption expenditure. The interest payment is not included as a government purchase because it is simply a transfer of income from a loan and does not represent the purchase of a new good or service. Likewise, the Social Security payment is a transfer payment, since it is simply moving income from one group to another and does not represent the purchase of a new good or service.

1. Determine whether each of the following examples would be included in Gross Domestic Product (GDP). b. Ford Motor Company buys four tires to put on a new Ford Mustang.

The purchase of the tires would not be included in GDP Explanation: Because Ford is using the tires to make a final good, the tires are considered an intermediate good and would not be included in GDP.

1. Determine whether each of the following examples would be included in Gross Domestic Product (GDP). c. The U.S. Air Force purchases two new fighter jets from Boeing.

The purchase of the two fighter jets would be included in GDP as a government purchase Explanation: When the government—in this case, the U.S. Air Force—purchases a final good to use, it is included in GDP. Because the government is making the purchase, the fighter jets would be recorded in the government purchases portion of GDP

7. The table below shows the expenditure components for the United States in 2015. Expenditures in the United States Expenditure Component Amount ($billions) Durable goods $1,367.1 Nondurable goods 2,666.0 Services 8,299.1 Nonresidential fixed investment 2,336.2 Residential fixed investment 645.4 Change in private inventories 111.9 Exports 2,264.9 Imports 2,789.0 Federal government 1,224.0 State and local government 1,994.9 Using the values in the table, calculate the following aggregate expenditures and nominal GDP. Instructions: Round your answers to one decimal place. a. What is the value of consumption expenditures in 2015? $ ___ billion b. What is the value of government expenditures in 2015? $ ___ billion c. What is the value of gross investment in 2015? $ ___ billion d. What is the value of nominal GDP in 2015? $ ___ billion

a. $ 12,332.2 billion b. $ 3,218.9 billion c. $ 3,093.5 billion d. $ 18,120.5 billion Explanations: a. To find the amount of consumption expenditures, we add the amount of durable goods, nondurable goods, and services together. Consumption Expenditures = Durable Goods + Nondurable Goods + Services We can find each of those values in the table, so in 2015, consumption expenditures = $1,367.1 + $2,666.0 + $8,299.1 = $12,332.2 billion. b. To find the amount of government expenditures, we add the amount of federal government and state and local government expenditures together. Government Expenditures = Federal Expenditures + State and Local Expenditures We can find those values from their respective rows in the table, so government expenditures = $1,224.0 + $1,994.9 = $3,218.9 billion. c. To find the amount of gross investment, we add the amount of nonresidential fixed investment, residential fixed investment, and change in private inventories together. Gross Investment = Nonresidential Fixed Investment + Residential Fixed Investment + Change in Private Inventories Again, we can find those values from their respective rows in the table, so gross investment = $2,336.2 + $645.4 + $111.9 = $3,093.5 billion. d. Nominal GDP is equal to consumption expenditures, gross investment, government purchases, and net exports added together. We already found consumption of $12,332.2 billion, gross investment of $3,093.5 billion, and government purchases of $3,218.9 billion. To find net exports, it is exports minus imports, and using the table net exports = $2,264.9 - $2,789.0 = $-524.1 billion. Nominal GDP = Consumption + Gross Investment + Government Purchases + Net Exports = $12,332.2 + $3,093.5 + $3,218.9 - $524.1 = $18,120.5 billion

10. The following table shows prices and quantities in the hypothetical economy of Lowlands for two different items in two different years. Assume these are the only two items produced in this economy. Prices and Output in a Two-Item Economy Year Good Price Output 1 Apples $1.50 560 2 Apples $1.80 620 1 Shirts $12.60 130 2 Shirts $14.60 150 Instructions: Enter your answers as a whole number. a. What is the value of nominal GDP for Lowlands in year 1? $ ___

a. $ 2,478 Explanation: To find nominal GDP for a given period, we take the price of each good or service and multiply it by the quantity of each good or service produced. Then we add up those prices multiplied by the quantities for every good or service produced in an economy. Most economies have millions of different goods or services, but we can see how it works in our two good example. For nominal GDP in year 1, we take the price of apples and multiply it by the quantity of apples produced in year 1. This would be $1.50 × 560 = $840.00, which is the amount that apples would contribute to GDP. We then take the price of shirts and multiply it by the quantity of shirts produced in year 1. This would be $12.60 × 130 = $1,638.00, which is the amount that shirts would contribute to GDP. Now that we have the amount that each of our goods contributes to GDP, we add the $840.00 + $1,638.00 = $2,478.00. Therefore, our total nominal GDP for year 1 is $2,478.00.

6. The table below shows nominal GDP, exports, and imports for the United States. Nominal GDP, Exports, and Imports Year Nominal GDP Exports Imports 2015 $17,267.1 $2,363.4 $2,843.7 2016 17,909.7 2,393.1 2,948.2 Instructions: Round your answers to one decimal place. If you are entering a negative number include a minus sign. a. Calculate the value of net exports in 2015. ___ billion b. Calculate the value of net exports in 2016. ___ billion

a. -480.3 billion b. -555.1 billion Explanations: Net exports are exports minus imports in a given period. a. For 2015, exports were $2,363.4 billion and imports were $2,843.7 billion. Therefore, net exports = $2,363.4 billion - $2,843.7 billion = -$480.3 billion. Negative net exports means that the economy imported more goods, services, and resources than it exported. b. For 2016, exports were $2,393.1 billion and imports were $2,948.2 billion. Therefore, net exports = $2,393.1 billion - $2,948.2 billion = -$555.1 billion. Negative net exports means that the economy imported more goods, services, and resources than it exported.

5. Suppose that Bill's Lawn Care begins the year with 5 lawn mowers. Throughout the year Bill purchases 2 new lawn mowers, but 3 of his lawn mowers break down. Instructions: Enter your answer as a whole number. If you are entering a negative number include a minus sign. a. What is gross investment for Bill's Lawn Care? ___ lawn mower(s) b. What is depreciation for Bill's Lawn Care? ___ lawn mower(s) c. What is net investment for Bill's Lawn Care? ___ lawn mower(s) d. The capital stock of Bill's Lawn Care -is decreasing. -is increasing. -remains constant.

a. 2 lawn mowers b. 3 lawn mowers c. -1 d. is decreasing Explanations: a. Gross investment for Bill's Lawn Care is the number of new lawn mowers purchased, or 2 lawn mower(s). b. Depreciation for Bill's Lawn Care is the number of lawn mowers that broke down this year, or 3 lawn mower(s). c. Net investment for Bill's Lawn Care is the difference between gross investment and depreciation, or -1 lawn mower(s). d. The capital stock of Bill's Lawn Care is decreasing. If net investment is positive, the capital stock is increasing. If net investment is negative, the capital stock is decreasing.

9. c. Payments for entrepreneurial ability include income earned -by individual proprietors and corporate profits. -in the form of wages and corporate profits. -by interest and corporate profits. -by individual proprietors and wages.

by individual proprietors and corporate profits. Explanation: Payments for entrepreneurial ability include income earned by individual proprietors and corporate profits

10. The following table shows prices and quantities in the hypothetical economy of Lowlands for two different items in two different years. Assume these are the only two items produced in this economy. Prices and Output in a Two-Item Economy Year Good Price Output 1 Apples $1.50 560 2 Apples $1.80 620 1 Shirts $12.60 130 2 Shirts $14.60 150 Instructions: Enter your answers as a whole number. b. What is the value of nominal GDP for Lowlands in year 2? $ ___

b. $ 3,306 Explanation: For nominal GDP in year 2, we take the price of apples and multiply it by the quantity of apples produced in year 2. This would be $1.80 × 620 = $1,116.00, which is the amount that apples would contribute to GDP in year 2. We then take the price of shirts and multiply it by the quantity of shirts produced in year 2. This would be $14.60 × 150 = $2,190.00, which is the amount that shirts would contribute to GDP in year 2. Now that we have the amount that each of our goods contributes to GDP, we add them together: $1,116.00 + $2,190.00 = $3,306.00. Therefore, our total nominal GDP for year 2 is $3,306.00.

9. a. Using the income approach, GDP is measured by the value of -expenditures for intermediate goods produced in an economy. -all final goods and services in an economy using the income they generate. -all intermediate goods produced in an economy using the income they generate. -expenditures for final goods and services in an economy.

all final goods and services in an economy using the income they generate. Explanation: Using the income approach, GDP is measured by the value of all final goods and services in an economy using the income they generate

10. The following table shows prices and quantities in the hypothetical economy of Lowlands for two different items in two different years. Assume these are the only two items produced in this economy. Prices and Output in a Two-Item Economy Year Good Price Output 1 Apples $1.50 560 2 Apples $1.80 620 1 Shirts $12.60 130 2 Shirts $14.60 150 Instructions: Enter your answers as a whole number. c. Assume year 1 is used as the base year for this economy. What is the value of real GDP in year 2? $ ___

c. $ 2,820 Explanation: In order to find real GDP, we use the base year's prices but the current year's quantities. Year 1 is our base year, so as long as it is our base year we will always use year 1 prices. In year 1, the price of apples was $1.50 and the price of shirts was $12.60. To find real GDP in year 2, we will use year 2 levels of output, which had 620 apples and 150 shirts. To calculate real GDP, we again take the price of each good (now using year 1 prices) multiplied by the quantities (using year 2 amounts). So real GDP would be the amount that apples contribute of $1.50 × 620 = $930.00 plus the amount that shirts contribute of $12.60 × 150 = $1,890.00 to get real GDP = $930.00 + $1,890.00 = $2,820.00.

10. The following table shows prices and quantities in the hypothetical economy of Lowlands for two different items in two different years. Assume these are the only two items produced in this economy. Prices and Output in a Two-Item Economy Year Good Price Output 1 Apples $1.50 560 2 Apples $1.80 620 1 Shirts $12.60 130 2 Shirts $14.60 150 Instructions: Enter your answers as a whole number. d. In Lowlands, if nominal GDP were used instead of real GDP, the value of output in year 2 would be ___.

d. overstated Explanation: Nominal GDP of $3,306.00 in year 2 was larger than real GDP of $2,820.00 in year 2. So if nominal GDP were used, the value of the output would be overstated. This is due to the fact that nominal GDP includes both price and quantity changes, whereas real GDP is able to hold prices constant.

9. b. The income approach is -equal to the expenditures approach. -greater than the expenditures approach. -less than the expenditures approach.

equal to the expenditures approach. Explanation: The income approach is equal to the expenditures approach. Every dollar of expenditure on final goods and services is a dollar of income for owners of land, labor, capital, and entrepreneurial ability

2. Determine whether each transaction below would be included in GDP, and if so, indicate which category it would fall under. Assume all goods and services are produced in the domestic country unless otherwise stated. c. The Smith family purchases a new boat. -included in GDP under gross investment -included in GDP under consumption expenditures -not included in GDP -included in GDP under net exports -included in GDP under government expenditures

included in GDP under consumption expenditures. Explanation: This is a purchase made by a household, so it is included in GDP under consumption expenditures.

2. Determine whether each transaction below would be included in GDP, and if so, indicate which category it would fall under. Assume all goods and services are produced in the domestic country unless otherwise stated. a. The city government purchases new playground equipment for the park. - not included in GDP - included in GDP under net exports - included in GDP under government expenditures - included in GDP under gross investment - included in GDP under consumption expenditures

included in GDP under government expenditures. Explanation: This is a purchase made by the government, so it is included in GDP under government expenditures.

2. Determine whether each transaction below would be included in GDP, and if so, indicate which category it would fall under. Assume all goods and services are produced in the domestic country unless otherwise stated. d. Design, Inc. purchases four of the latest-model laptops to be used in its web design business. -included in GDP under gross investment -not included in GDP -included in GDP under net exports -included in GDP under consumption expenditures -included in GDP under government expenditures

included in GDP under gross investment Explanation: This is a purchase made by a firm, so it is included in GDP under gross investment.