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“The Macroeconomic Perspective”

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Assignment 12 “Measures of Economic Performance: Gross Domestic Product”

Learning Objectives

Students will be able to

• Understand how Gross domestic Product (GDP) is defined and measured.

• Understand difference between real GDP and nominal GDP

• Identify the components of GDP on the demand side and on the supply side

Main Contents

1. The nature of macroeconomics: Macroeconomic Goals, framework, and tools.

2. Measuring the Size of the Economy: Gross Domestic Product

• The expenditure approach / by components on the demand side

• The income approach / by components on the supply side

3. Real GDP vs nominal GDP; market baskets and price indexes

4. Other national accounts: net national product (NNP), national income (NI), personal income (PI), and disposable income (DI).

Resources

• OpensTax. , look for “Principles of Macroeconomics Textbook”. Chapter 6 “The Macroeconomic Perspective”, pages 131-158.

• McConnell, Campbell; Brue, Stanley; and Flynn, Sean. “Economics, Principles, Problems, and Policies”. 18th Edition, New York, 2009. , chapters 24 “Measuring Domestic Output and National Income” (pages 479-497)

• “Real vs. nominal GDP”. Khan Academy Video.

• “Components of GDP”. Khan Academy Video.

• “Circular flow of income and expenditures”. Khan Academy Video.

• “Components of GDP”. Khan Academy Video.

• “GDP deflator” Khan Academy Video.

• Ray, Margaret; and Anderson, David. “Krugman’s Macroeconomics for AP”. Worth Publishers/BFW, 2011

• Anderson, David. “Economics by Examples”. Worth Publishers/BFW, 2007

Online Resources

• OpenStax College. Principles of Economics

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Vocabulary and Key Terms

• Macroeconomics questions

• Gross domestic product (GDP)

• Expenditure approach

• Income approach

• Personal consumption expenditures (C)

• Gross private domestic investment (I)

• Government purchases (G)

• Net exports (Xn)

• Nominal GDP

• Real GDP

• Price Index

Measuring Domestic Output and National Income”

Study Questions

1. Why do economists include only final goods in measuring GDP for a particular year? Why don't they include the value of the stocks and bonds bought and sold? Why don't they include the value of the used furniture bought and sold?

2. What are the main components of measuring GDP with what is demanded?

3. What are the main components of measuring GDP with what is produced? Would you usually expect GDP as measured by what is demanded to be greater than GDP measured by what is supplied, or the reverse?

4. Country A has export sales of $20 billion, government purchases of $1,000 billion, business investment is $50 billion, imports are $40 billion, and consumption spending is $2,000 billion. What is the dollar value of GDP?

5. Which of the following are included in GDP, and which are not?

a. The cost of hospital stays

b. The rise in life expectancy over time

c. Child care provided by a licensed day care center

d. Child care provided by a grandmother

e. The sale of a used car

f. The sale of a new car

g. The greater variety of cheese available in supermarkets

h. The iron that goes into the steel that goes into a refrigerator bought by a consumer.

6. Below is a list of domestic output and national income figures for a certain year. All figures are in billions. The questions that follow ask you to determine the major national income measures by both the expenditures and the income approaches. The results you obtain with the different methods should be the same.

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a. Using the above data, determine GDP by both the expenditures and the income approaches.

7. Last year, a small nation with abundant forests cut down $200 worth of trees. $100 worth of trees were then turned into $150 worth of lumber. $100 worth of that lumber was used to produce $250 worth of bookshelves. Assuming the country produces no other outputs, and there are no other inputs used in the production of trees, lumber, and bookshelves, what is this nation's GDP? In other words, what is the value of the final goods produced including trees, lumber and bookshelves?

8. Why must double counting be avoided when measuring GDP?

9. Ethiopia has a GDP of $8 billion (measured in U.S.dollars) and a population of 55 million. Costa Rica has a GDP of $9 billion (measured in U.S. dollars) and a population of 4 million. Calculate the per capita GDP for each country and identify which one is higher.

10. In 1980, Denmark had a GDP of $70 billion (measured in U.S. dollars) and a population of 5.1 million. In 2000, Denmark had a GDP of $160 billion (measured in U.S. dollars) and a population of 5.3 million. By what percentage did Denmark’s GDP per capita rise between 1980 and 2000?

11. What is the difference between a series of economic data over time measured in nominal terms versus the same data series over time measured in real terms? How do you convert a series of nominal economic data over time to real terms?

12. Suppose that in 1984 the total output in a single-good economy was 7000 buckets of chicken. Also suppose that in 1984 each bucket of chicken was priced at $10. Finally, assume that in 2000 the price per bucket of chicken was $16 and that 22,000 buckets were produced. Determine the GDP price index for 1984, using 2000 as the base year. By what percentage did the price level, as measured by this index, rise between 1984 and 2000?

13. The following table shows nominal GDP and an appropriate price index for a group of selected years. Compute real GDP. Indicate in each calculation whether you are inflating or deflating the nominal GDP data.

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14. What are the two main difficulties that arise in comparing the GDP of different countries?

15. List some of the reasons why GDP should not be considered an effective measure of the standard of living in a country.

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