Chapter

GDP and the Standard of Living

ANSWERS TO CHECKPOINTS CHECKPOINT 5. ! GDP" In#o$e" and E%&endit're
1. Classify the following items as a final good or an intermediate good and expenditure on final goods as consumption expenditure or investment: The fertilizer bought by a Florida tomato grower. The fertilizer is an intermediate good because it will be used to grow tomatoes. The ringtone you bought today. The ringtone is a final good because you are the final user. It is part of consumption expenditure. ew computers bought by !epsiCo. The computers are a final good. Because they are purchased by Pepsi, they are investment. The aircraft bought by "outhwest #irlines. The aircraft bought by Southwest irlines is a final good. Because they are purchased by Southwest irlines, they are investment.

() $.

Part 2 . MONITORING THE MACROECONOMY

Figure 5.1 shows the flows of expenditure and income on %ig Foot &sland. &n $''() W was *+' million, V was *$' million, U was *15 million, X was *$5 million, and Z was zero. Calculate total income) and net taxes. Total income e!uals total expenditure and total expenditure e!uals the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services. In "igure #.$, consumption expenditure e!uals flow W and is %&' million( investment is X and is %)# million( government expenditure on goods and services is flow U and is %$# million( and, net exports of goods and services is flow Z and is %'. So total expenditure e!uals %$'' million. Total income e!uals total expenditure, so total income e!uals %$'' million. To calculate net taxes, subtract from households* total income their consumption expenditure and their saving. Total income e!uals total expenditure, so total income e!uals %$'' million. +onsumption expenditure is %&' million and saving, which is flow V, is %)' million, so net taxes e!uals %)' million.

CHECKPOINT 5.*! +ea,'ring -.S. GDP

The table shows some of the items in the -.". ational &ncome and !roduct #ccounts in $''5. -se the table to answer .xercises 1) $) and /. Ite$ A$o'nt .tri//ion, of do//ar,0 6.0 2.0 2.% &.%

1.

Wages Government expen !t"re Interest# rent# an pro$!t Cons"mpt!on expen !t"re Investment '.6 Net exports 0 In !re(t taxes )ess 0.& s"*s! !es Reta!ne pro$!ts '.6 Trans$er pa+ments '., Persona) !n(ome taxes '.' GNP '0..epre(!at!on '., -se the income approach to calculate net domestic product at factor cost and the statistical discrepancy. ,sing the income approach, net domestic product at factor cost - .ages / Interest, rent, and profit - %&.' trillion / %).0 trillion - %1.0 trillion. The statistical discrepancy e!uals the 23P expenditure total minus the 23P income total. 23P calculated using the expenditure approach is %$$.' trillion. To

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calculate 23P using the income approach, we add net domestic product at factor cost, indirect taxes less subsidies, and depreciation. So 23P using the income approach e!uals %1.0 trillion / %'.4 trillion / %$.5 trillion - %$'.0 trillion. So the statistical discrepancy e!uals %$$.' trillion %$'.0 trillion - %&'' billion. $. Calculate the differences between 01!) 0 !) and -.". national income. 26P e!uals 23P plus net factor income from abroad, so the difference between the two is net factor income from abroad. 6et factor income from abroad - 26P 23P, so using the data in the problem, net factor income from abroad - %$$.' trillion %$'.# trillion - %#'' billion. ,.S. national income - 26P depreciation statistical discrepancy - %$'.# trillion %$.5 trillion %&'' billion - %4.& trillion. Calculate disposable personal income. 2hat percentage of total income is disposable personal income and what percentage of disposable personal income is consumption expenditure3 3isposable personal income - national income retained profits plus transfer payments personal income taxes - %4.& trillion %$.& trillion / %$.5 trillion %$.$ trillion - %&.) trillion. s a percentage of ,.S. national income, disposable personal income is 7%&.) trillion 8 %4.& trillion9 $'' - 1$.& percent. s a percentage of disposable personal income, consumption is 7%4.0 trillion 8 %&.) trillion9 $'' - $$: percent. The two tables show some data for an economy. &f the GDP data for *22) base year is $''5) calculate the economy6s nominal 01! and real 01! in $''+. Ite$ 3'antit4 Pri#e App)es 60 20.-0 Oranges 30 20.2GDP data for *22( Ite$ 3'antit4 Pri#e App)es '60 2'.00 Oranges 220 22.00 6ominal 23P e!uals 7&' apples %'.#' per apple9 / 71' oranges %'.)# per orange9 - %#'. ;eal 23P in )''& is calculated using the )''& !uantities and the )''1 prices. ;eal 23P e!uals 7&' apples %$.'' per apple9 / 71' oranges %).'' per orange9 - %))'.

/.

4.

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Part 2 . MONITORING THE MACROECONOMY

CHECKPOINT 5.5! The -,e and Li$itation, of Rea/ GDP

1. The -nited ations 7uman 1evelopment 8eport gives the following data for real 01! per person in $''$: China) *4)55', 8ussia) *5)$/', Canada) *$9)45', -nited "tates) */5)(5'. :ife expectancy at birth is (9./ in Canada) ((.' in the -nited "tates) ('.5 in China) and ++.( in 8ussia. Freedom 7ouse rates political freedom as follows: Canada and the -nited "tates) 1.1 ;1.' is the most free<, 8ussia) 4.5, and China) (.+ ;ratings in the (= range are the least free<. 7ow do life expectancy at birth and political freedom change the relative ran>ing of living standards that real 01! per person indicate3 The relatively high life expectancy and political freedom means +anada*s and the ,nited States* relative ran<ings rise. The low life expectancy and political freedom decrease +hina*s and ;ussia*s ran<ings.

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ANSWERS TO CHAPTER CHECKPOINT

1.

Pro7/e$,

The figure shows the flows of income and expenditure in an economy. &n $''() U was *$ trillion) V was *1.5 trillion) W was *( trillion) X was *1.5 trillion) and Z was zero. Calculate total income) net taxes) and 01!. Total income 7which is flow Q9 e!uals total expenditure, the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports of goods and services. "low U is government expenditure on goods and services, G( flow W is consumption expenditure, C( flow X is investment, I( and flow Z is net exports of goods and services, NX. Total expenditure e!uals %4 trillion / %$.# trillion / %) trillion / %', which is %$'.# trillion, so total income also e!uals %$'.# trillion. 6et taxes e!ual total income minus consumption expenditure and saving. Total income is %$'.# trillion. +onsumption expenditure is %4 trillion. Saving is the flow into the financial mar<ets 7flow V9 and e!uals %$.# trillion. So net taxes e!ual %$'.# trillion %4 trillion %$.# trillion, which is %) trillion. Total income e!uals total expenditure which e!uals 23P, so 23P e!uals %$'.# trillion. The national accounts of !archment !aradise are >ept on ;you guessed it< parchment. # fire destroys the statistics office) and the accounts are now incomplete) but the data they contain for $''( are: 01! ;income approach< *$)9'' Consumption expenditure *$)''' &ndirect taxes less subsidies *1'' &nterest) rental) and profit *5'' &nvestment *5'' 0overnment expenditure *4'' 2ages *$)''' et factor income from abroad *5' et exports were ?*$'' -se this information to calculate the missing data in !roblems $ and /. $. 01! ;expenditure approach< and depreciation. "or the expenditure approach, 23P e!uals the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports. "ortunately, these data were saved from the fire. =ence 23P - C + I + G + NX %),''' / %1'' / %0'' %)'' - %5,'''.

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Part 2 . MONITORING THE MACROECONOMY

"rom the income approach, 23P e!uals the sum of wages plus interest, rent, and profit plus indirect taxes less subsidies plus depreciation. The value of the income approach 23P survived the fire and is %),:''. The sum of wages plus interest, rent, and profit plus indirect taxes less subsidies e!uals %),''' / %#'' / %$'' %),&''. So depreciation e!uals %),:'' %),&'' - %5''. et domestic product at factor cost) the statistical discrepancy) and 0 !. 6et domestic product at factor cost e!uals the sum of wages, interest, rent, and profit. >nce again, all these data were fortunately saved from the fire, so net domestic product at factor cost - %),''' / %#'' - %),#''. The statistical discrepancy e!uals 23P from the expenditure approach, %5,''' from problem ), minus 23P from the income approach, %),:''. So the statistical discrepancy is %$''. 26P e!uals 23P plus net factor income from abroad. "rom problem ), 23P is %5,'''. 6et factor income from abroad is %#'. So 26P e!uals %5,''' / %#' %5,'#'. #n economy produces only fun and food. The table shows the @uantities of fun and food produced and the prices of fun and food in $''( and $''5. The base year is $''(. -se this information to answer !roblems 4 and 5. 4. Calculate nominal 01! in $''( and $''5. 6ominal 23P in )''4 is e!ual to 70' units of fun %)9 / 7&' units of food %59 - %)&'. 6ominal 23P in )''1 is e!ual to 700 units of fun %59 / 74) units of food %)9 - %)4&. 5. Calculate the percentage increase in production in $''5. The percentage increase in production is e!ual to the percentage increase in real 23P. In the base year, real 23P e!uals nominal 23P, so real 23P in )''4 is GDP data for *221 Ite$ 3'antit4 Pri#e 4"n %0 22 4oo 60 2, GDP data for *22( Ite$ 3'antit4 Pri#e 4"n %% 2, 4oo &2 22 %)&'. ,sing prices from )''4, 23P in )''4 is %)&' and 23P in )''1 is %5'0. ,sing )''4 prices, real 23P grew ?7%5'0 %)&'9@%)&'A x $'', or $&.: percent. /.

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8etail "ales 8ose "lightly in #ugust The Commerce 1epartment reported Friday that retail sales increased './ percent in #ugust from Auly) B The government also said that the current account) the broadest measure of Cnet exports wasD down /.1 percent from *19(.1 billion in the first three months of the year. B &nventories held by businesses B rose by '.5 percent in Auly) the Commerce 1epartment said Friday) while sales at all levels of production were up 1.1 percent. The #ssociated !ress) The New York Times) "eptember 15) $''( -se this information to answer !roblems +) () and 5. +. 2hich component of 01! changed because retail sales increased3 2hich component of 01! changed because inventories held by businesses rose3 The increase in retail sales means that consumption expenditure on goods and services increased. The increase in inventories held by businesses means that investment increased. (. .xplain the effect of the fall in net exports on 01!. Because net exports contributes to 23P, the fall in net exports means that 23P decreases. 5. 1oes the statement that Esales at all levels of production were up 1.1 percentF mean that 01! increased by 1.1 percent3 .xplain your answer. The statement Bsales at all levels of production were up $.$ percentC is obscure. If Bsales of all levels of productionC includes final goods and intermediate goods, then 23P is not up $.$ percentDit is up by less than $.$ percent. If sales really means Bretail sales at all levels of productionC then it doesn*t include all final goods and 23P is up by more than $.$ percent.

E%er#i,e,
1. Classify each of the following items as a final good or service or an intermediate good or service and identify which is a component of consumption expenditure) investment) or government expenditure on goods and services: %an>ing services bought by 2alGHart. Ban<ing services purchased by .alEFart is an intermediate service. "ecurity system bought by the 2hite 7ouse. The security system purchased by the .hite =ouse is a final good. It is part of government expenditure on goods and services. Coffee beans bought by "tarbuc>s. +offee beans purchased by Starbuc<s are an intermediate good. ew coffee grinders bought by "tarbuc>s. 6ew coffee grinders purchased by Starbuc<s are final goods. They are part of investment. "tarbuc>6s grande mocha frappuccino bought by a student. The student*s purchase is a final good. It is part of consumption expenditure on goods and services. ew battle ship bought by the -.". navy.

6*

Part 2 . MONITORING THE MACROECONOMY

The new battle ship purchased by the ,.S. navy is a final good. It is part of government expenditure on goods and services. $. Iou are provided with the following data on the economy of &beria: 01! *1'' billion et taxes *15 billion 0overnment expenditure on goods and services *$' billion 7ousehold saving *15 billion Consumption expenditure *+( billion &nvestment *$1 billion .xports of goods and services */' billion Calculate &beria6s imports of goods and services. 23P e!uals C +I +G +NX. ;earranging, NX - 23P C I G. So Iberia*s net exports e!ual %$'' billion %&4 billion %)$ billion %)' billion, which is %1 billion. 6et exports e!ual exports imports, so imports e!ual exports minus net exports. Iberia*s imports e!ual %5' billion 7%1 billion9, which is %51 billion. /. Figure 5./ shows the flows of income and expenditure in an economy. &n $''() Q was *1)''' billion) U was *$5' billion) W was *+5' billion) and Z was *5' billion. Calculate investment and total income. "low Q is total income, so total income is %$,''' billion. Total expenditure e!uals the sum of consumption expenditure 7flow W or %&#' billion9, investment, government expenditure on goods and services 7flow U or %)#' billion9, and net exports of goods and services 7flow Z or %#' billion9. Total expenditure also e!uals total income. So using the data in the exercise, %$,''' billion - %&#' billion / investment / %)#' billion / %#' billion. This e!uation shows that investment e!uals %#' billion. Figure 5./ shows the flows of income and expenditure in an economy. &n $''5) X was *$ trillion) R was */ trillion) Z was ?*1trillion) Q was *1' trillion) and U was *4 trillion. Calculate saving and consumption expenditure. "low Q is total income, so total income is %$' trillion. Total expenditure e!uals the sum of consumption expenditure, investment 7flow X or %) trillion9, government expenditure on goods and services 7flow U or %0 trillion9, and net exports of goods and services 7flow Z or %$ trillion9. Total expenditure also e!uals total income. So using the data in the exercise, %$' trillion - consumption expenditure / %) trillion / %0 trillion %$ trillion. This e!uation shows that consumption expenditure e!uals %# trillion. =ouseholds divide their income into consumption expenditure, net taxes, and saving. s a result, total income e!uals the sum of consumption expenditure, net

4.

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65

taxes, and saving. Total income is %$' trillion, consumption expenditure is %# trillion, and net taxes 7flow R9 is %5 trillion. =ence saving 7flow V9 is %) trillion. #n economy produces only fish and berries. The tables show the @uantities produced and their prices in $''9 and $'1'. The base year is $''9. -se this information to answer .xercises 5 and +. 5. Calculate nominal 01! in $''9 and $'1' and real 01! in $''9 and $'1'. 6ominal 23P in )'': is e!ual to 7#' fish %59 / 74) berries %59 - %5&&. 6ominal 23P in )'$' is e!ual to 7#$ fish %09 / 71' berries %&9 - %&10. In the base year, real 23P e!uals nominal 23P, so real 23P in )'': is %5&&. ;eal 23P in )'$' uses )'$' !uantities and )'': prices and so e!uals 7#$ fish %59 / GDP data for *226 Ite$ 3'antit4 Pri#e 4!s/ -0 2, 5err!es &2 2, GDP data for *2 2 Ite$ 3'antit4 Pri#e 4!s/ -' 2% 5err!es 30 26 71' berries %59 - %5:5. +. Calculate the percentage increase in production in $'1'. The percentage increase in production e!uals the percentage increase in real 23P. ;eal 23P grew ?7%5:5 %5&&9@%5&&A x $'', or 4.0 percent.

ewG7ome "ales 7it (GIear :ow 1espite huge discounts) sales of new homes last month slowed to their slowest pace in seven years) setting the stage for further price declines well into next year. B &n addition) the government reported that the nation6s gross domestic product expanded at an annual rate of /.5J in the #prilGtoGAune @uarter) slightly less than the 4J estimated earlier. #fterGtax corporate profits rose 5.$J to *1.15 trillion. B Wall Street Journal) "eptember $5) $''( -se this information to answer .xercises ( and 5. (. 2here in the -.". ational &ncome and !roduct #ccounts and the circular flow of expenditure and income do new home sales appear3 7ow does a fall in new home sales affect real 01!3 .xplain your answer. 6ew home sales are part of the investment component of expenditure. In the circular flow, they are part of the expenditures coming from the financial mar<ets to the goods mar<ets. fall in new home sales decreases investment and thereby directly decreases real 23P. 5. &f corporate profits rose by 5.$ percent and real 01! increased by /.5 percent) what do you thin> happened to the compensation of employees3 .xplain your answer. +orporate profits are part of the Binterest, rent, and profitC component of income in the ,.S. 6ational Income and Product ccounts. If corporate profits rose by #.) percent while real 23P increased by only 5.1 percent, compensation of

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Part 2 . MONITORING THE MACROECONOMY

employees probably grew at less than 5.1 percent, unless Binterest and rentC grew so slowly to allow compensation of employees to grow more rapidly.

Criti#a/ Thin9ing and We7 A#tivitie,

1. %oeing outsources the production of some of the components of its new (5( airliner to Aapan. #t the same time) Toyota outsources the manufacture of cars to Kentuc>y. a. .xplain how %oeing6s outsourcing decision affects -.". 01!) -.". 0 !) and real 01! per person in the -nited "tates. 2oods and services produced within the ,nited States are part of ,.S. 23P. Boeing*s decision to produce part of its new 414 airliner in Gapan means that this production is not produced within the ,nited States and so it is not part of ,.S. 23P. 2oods and services produced anywhere in the world using factors of production supplied by residents of the ,nited States are part of ,.S. 26P. Boeing*s decision to produce parts of airliners in Gapan means that Boeing will supply ,.S. owned factors production to Gapan. "or instance, ,.S. engineers employed by Boeing and wor<ing in Gapan are a ,.S. factor of production producing a good in another country. So payments to ,.S. engineers and other ,.S. citizens as well as payments to other ,.S. factors of production, such as Boeing*s profit, will be included in ,.S. 26P. b. .xplain how Toyota6s outsourcing decision affects -.". 01!) -.". 0 !) and real 01! per person in the -nited "tates. 2oods and services produced within the ,nited States are part of ,.S. 23P. So Toyota*s decision to outsource its manufacture of cars to Hentuc<y means that this production will be included as part of ,.S. 23P because it ta<es place within the ,nited States. 2oods and services produced anywhere in the world using factors of production supplied by residents of the ,nited States are part of ,.S. 26P. Some of the factors of production ma<ing the Toyota cars are Gapanese factors of production, "or instance, Gapanese engineers wor<ing in Hentuc<y are Gapanese not ,.S. factors of production. The payments to all the Gapanese factors of production wor<ing in Hentuc<y are not part of ,.S. 26P $. 7ow do underground economic activities affect the usefulness of the national accounts for comparing the value of production over time and across countries3 2hat underground economic activities do the national accounts miss3 1o these activities contribute to the standard of living3 1o you thin> that it would be worth expanding the scope of the accounts to include estimates of the value of underground activities3 ,nderground economic activities undermine 7I9 the usefulness of the national income accounts. "or example, there is a bias in the comparison when comparing 23P in an Jastern Juropean country, where underground activities are extensive, with 23P in a .estern Juropean country, where underground activities are less extensive. +ompared to the .estern Juropean country, the Jastern Juropean country*s standard of living loo<s much lower than it actually is. ,nderground economic activities include Kobs done for cash to avoid paying taxes, as well as production and sale of illegal goods and services. Some of these activities contribute to the standard of living. In particular, the Kobs off the boo<s done for cash to avoid taxes contribute the same amount to the standard of living as if they

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were done on the boo<s. In the ,nited States, underground economic activities are probably not extensive enough to warrant spending a large sum of money to try to measure them. In other countries, though, the amount of underground economic activities may be substantial enough to ma<e measuring them a worthwhile endeavor. /. The -nited ations 7uman 1evelopment &ndex is based on the levels of 01! per person) life expectancy at birth) and indicators of the @uality and @uantity of education. 1o you thin> the -nited ations should expand its index to include items such as pollution) resource depletion) and political freedom3 #re there any other factors that influence the standard of living that you thin> should be included in a comprehensive measure3 If the ,nited 6ations is trying to measure the standard of living, pollution and political freedom should be included. The difficulty comes in determining their values. "or instance, how much is political freedom valuedL 3o we add #' times the measure of political freedom to 23P or do we add $'' times political freedom to 23PL nother important factor that could be included is the value of leisure time. This value is a bit easier to calculate. Meisure time must be at least as valuable as time spent at wor< 7or else more time would be spent at wor<9 so the wage rate provides a good measure of the value of leisure time. The distribution of income might also be used in the ,nited 6ation*s measure if the ,.6. is interested in measuring the standard of living of a typical person within a nation. 4. Lisit the %ureau of .conomic #nalysis 2eb site and obtain the most recently released ational &ncome and !roduct #ccount data for the -nited "tates. #lso visit the Census %ureau 2eb site and obtain data on the -.". population. For the most recently available @uarter) a. 2hat are the values of consumption expenditure) investment) government expenditure) and net exports3 Nour students* answers will vary according to when you assign the problem. By way of example, in >ctober )''4, the most recently released data were for the )nd !uarter of )''4. "rom the BJ *s .eb site, the nominal data areO +onsumption expenditure 7called Bpersonal consumption expendituresC9, %:,&40.' billion( Investment 7called Bgross private domestic investmentC9, %),$5:.$ billion( 2overnment expenditures 7called Bgovernment consumption expenditures and gross investment9, %),&4'.'( and 6et exports, %4$0.) billion. 7The real data for the same !uarter areO +onsumption expenditure, %1,)00.5 billion( Investment, %$,154.0 billion( 2overnment expenditure, %),'$0.1( and 6et exports, %#45.: billion.9 b. Chec> that when you sum the items in part a) the total e@uals 01!. The sum of these four nominal expenditure categories is %$5,4&:.1 billion, which is '.$ billion different as the reported nominal 23P. The difference is rounding error. 7The sum of the four real expenditure categories is %$$,#)).& billion, a bit different from the reported real 23P of %$$,#)'.$ billion. Though the students will not be aware of it, the larger difference for the real numbers compared to the nominal numbers is that each of the four real components and real 23P is calculated separately using its own chain of growth rates. So the real components will not necessarily sum to e!ual real 23P.9

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Part 2 . MONITORING THE MACROECONOMY

2hich of the components of 01! increased the most3 2hich increased the least3 Nour students* answers will vary according to when you assign the problem. d. 2hat was real 01! per person in the -nited "tates3 Nour students* precise answers will vary according to when you assign the problem. The answer should be, however, near %51,''' or so. 5. Lisit the %ureau of .conomic #nalysis 2eb site and obtain the most recently released real 01! dataM0ross "tate !roductMfor the state in which you live. Lisit the Census %ureau 2eb site and obtain data on the population of your state. a. Calculate 0ross "tate !roduct per person in your state. Compare this number with the -.". average for the same time period. Nour students* answers will vary according to your state. b. 2hich industries in your state contribute most to your state6s production3 Nour students* answers will vary according to your state. +. Lisit the &nternational Honetary Fund 2orld .conomic Nutloo> 2eb site and obtain data for 195' and the current year for the -nited "tates and Aapan that enable you to answer the following @uestions. a. 2hich country had the greater increase in real 01! per person3 Nour students* answers will vary according to when you assign the problem. "or an example of an answer, using the data available in )''4, ,.S. real 23P per person in constant dollars in $:1' was %)),&4&.#5 and in )''# was %51,#):.5#. So in the ,nited States, real 23P per person grew by ?7%51,#):.5# %)),&4&.#59 8 %)),&4&.#5A P $'' - &:.: percent. In Gapan, Gapanese real 23P per person in constant yen in $:1' was Q),#1#,555 and in )''# was Q0,5:),$&'. In Gapan over these years real 23P per person grew by ?7Q0,5:),$&' Q),#1#,5559 8 Q),#1#,555A P $'' - &:.: percent. So in >ctober, )''4, both countries had enKoyed virtually the identical growth rate of about 4' percent. 7SourceO httpO@@www.imf.org@external@pubs@ft@weo@)''4@'$@data@weoselco.aspxL g-$$'Rsg- ll/countries/S)f/ dvanced/economies9. b. 2hat is the 01! of each country as a percentage of world 01!3 Nour students* answers will vary according to when you assign the problem. "or example, in >ctober )''4, the ,.S. 23P was $:.4 percent of world 23P and the Gapanese 23P was &.5 percent of world 23P. 7httpO@@www.imf.org@external@pubs@ft@weo@)''4@'$@pdf@statappx.pdf9 c. 2hat do you learn from your answers to parts a and b about the standard of living in Aapan and the -nited "tates3 Nour students* answers might vary according to when you assign the problem. In general, however, part 7a9 shows that ,.S. real 23P per person grew more rapidly that Gapanese real 23P per person, so the standard of living grew more rapidly in the ,nited States. Part 7b9 shows that the ,nited States is a distinctly larger part of the world economy than is Gapan.

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ADDITIONAL E:ERCISES ;OR ASSIGN+ENT 3'e,tion,

CHECKPOINT 5. ! GDP" In#o$e" and E%&endit're $. Identify each of the following as either included or not included in 23P. Fa<e sure to give an explanation for those that you Kudge as not included. In addition, state whether each included item is consumption, investment, government expenditure, or net exports. $a. The purchase of copy paper by Pepsi+o, which is used by the company staff. $b. The purchase of an electronic handheld organizer by a sales manager to <eep trac< of clients. $c. The purchase of a new aircraft carrier by the 6avy. $d. n increase in 3ell*s inventory of unsold personal computers. $e. family eating dinner at Taco Bell. $f. The salary of the President of the ,nited States. $g. Fom ba<ing a birthday ca<e for her 1 yearEold daughter. $h. The sale of a used computer. $i. Nour donation of a used computer to a local elementary school. $K. The purchase by a 2erman resident in 2ermany of an mericanEmade ceiling fan produced in the ,nited States. CHECKPOINT 5.*! +ea,'ring -.S. GDP Ite$ Cons"mpt!on expen !t"re Investment Government expen !t"res Exports Imports .epre(!at!on ). ,sing the information in the table above, calculate 23P. Do//ar, 300 %00 200 -0 &'00

A$o'nt Ite$ .tri//ion, of do//ar,0 Cons"mpt!on expen !t"re %.6& Investment '.'% Government expen !t"res '.,& Net exports 0.03 Wages %.20 Interest# rent# an pro$!t '.63 .epre(!at!on 0.36 5. The table above gives some of the items in the ,.S. 6ational Income and Product ccounts in $::#. 5a. ,se the expenditure approach to calculate ,.S. 23P in $::#. 5b. ,se the income approach to calculate ,.S. net domestic product at factor cost in $::#. 5c. +alculate 23P minus net domestic product at factor cost in $::#.

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Part 2 . MONITORING THE MACROECONOMY

5d. +alculate indirect taxes less subsidies in $::#.

An,<er,
CHECKPOINT 5. ! GDP" In#o$e" and E%&endit're $a. 6ot included because it is an intermediate good. $b. Included as part of investment. $c. Included as part of government expenditures. $d. Included as part of investment. $e. Included as part of consumption expenditure. $f. Included as part of government purchases. $g. 6ot included because it is household production. $h. 6ot included because it was included in 23P in the year it was produced. $i. 6ot included because it was included in 23P in the year it was produced. $K. Included as part of net exports. CHECKPOINT 5.*! +ea,'ring -.S. GDP ). 23P e!uals the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports. So 23P - %1'' / %0'' / %)'' / 7%#' %4#9, which is %$,54#. The amount of depreciation is not used. 5a. ,sing the expenditure approach, 23P = C + I + G + NX - %0.:4 trillion / %$.$0 trillion / %$.54 trillion %'.'1 trillion - %4.0' trillion. 5b. ,sing the income approach, net domestic product at factor cost - .ages / Interest, rent, and profit - %0.)' trillion / %$.&1 trillion - %#.11 trillion. 5c. 23P minus net domestic product at factor cost - %4.0' trillion %#.11 trillion %$.#) trillion. 5d. The difference between 23P and net domestic product at factor cost, %$.#) trillion, is e!ual to depreciation plus 7indirect taxes minus subsidies9. "rom the table, depreciation, %'.1: trillion. So indirect taxes minus subsidies - %$.#) trillion %'.1: trillion - %'.&5 trillion.

C/apter - . G.P an t/e 0tan ar o$ 1!v!ng

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