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Barro Macroeconomics Chapter 2 National Income Accounting DF PDF
Barro Macroeconomics Chapter 2 National Income Accounting DF PDF
Practice problems and illustrative test questions for the final exam
This posting gives sam ple final exam problem s. Other topics from the textbook are asked as well; these
problem s are just exam ples. All final exam problem s are m ultiple choice; som e practice problem s are not
m ultiple choice so that the solutions m ethods can be explained with no distraction of wrong choices.
A. 340,000
B. 350,000
C. 390,000
D. 410,000
E. 460,000
Answer 1.1: A
GDP (Gross Dom estic Product) is the wealth produced in the country, regardless who owns the wealth. GNP
is the wealth produced by citizens of the country, regardless where the wealth is produced.
GDP is the better m easure of the wealth produced in the country. W e dont care about the citizenship of the
people producing the wealth. If Jacob and Jacque work as actuaries and each produces 50,000 of wealth,
GDP increases the sam e am ount from each worker, even if Jacob is a citizen and Jacques is a foreigner.
GDP is the better m easure of the wealth produced by the citizens. W e dont care where the people work. If
Jacob and Rachel are oil engineers earning 50,000 apiece, GNP increases the sam e am ount from each
worker, even if Jacob works in Texas and Rachel works in Libya.
Answer 1.2: E
Statement A: GDP m ay be m ore or less than GNP. For the world as a whole (com bining the national incom e
accounts for all countris), GDP = GNP.
Statement C: National incom e is m ore than personal incom e in the United States, though the relation depends
on the size of personal transfer paym ents and corporate taxes.
Statement D: National incom e = NNP (net national product), except for statistical discrepancies.
A. 150
B. 180
C. 220
D. 230
E. 240
Answer 1.3: B
Measuring by the production approach gives National incom e = NNP = 10 + 780 + 100 = 890.
Subtract factor incom e from abroad to get NDP = 890 10 = 880.
Add depreciation to get GDP = 880 + 30 = 910.
Use expenditure approach: GDP = 500 + 250 + (40 60) + investm ent
A investm ent = 910 (500 + 250 + 40 60) = 180
France has proposed a GDP yardstick that better m easures social welfare.
Part A: The problem s of real GDP as a m easure of social welfare are shown by the Soviet satellites before
the collapse of the Soviet Union, such as East Germ any. Industrial production was forced on com m unities with
no concern for environm ental hazards. The social welfare costs of pollution often exceeded the welfare
benefits of higher real GDP.
Part B: Social welfare costs like global warm ing and degradation of the environm ent depend on the observer.
Carbon dioxide em issions m ight expose the world to natural catastrophes and a less healthy environm ent
m any years in the future, but these costs are unknown.
Part C: Econom ic progress is often the best way to solve other problem s. W ealthier countries can afford better
education and health care for their citizens; program s to reduce air and water pollution; and welfare paym ents
to reduce incom e inequality. During the transition phase, developing countries m ay neglect non-econom ic
goals, and they m ay have high growth rates of real GDP but poor results on other objectives. In the steady
state phase, the wealthier countries have the best grades on other indices of social welfare.
The textbook lists item s that are not in GDP but affect social welfare.
See Barro Macroeconomics Chapter 2 National Incom e Accounting, page 15, colum n 2.
** Exercise 1.5: Inflation indices
An econom y produces only two goods: bread and m uffins. Consum ers buy bread vs m uffins by their relative
prices. From 2000 to 2010, the price of a loaf of bread increases from $1 to $2 and the price of a m uffin
increases from $2 to $3.
Part A: In 2000, one loaf of bread can buy a m uffin; in 2010, one loaf of bread can buy b of a m uffin. The
relative price of bread have increased b / 1 = 33.33%.
In 2000, one m uffin can buy two loaves of bread; in 2010, one m uffin can buy 1.5 loaves of bread. The relative
price of bread has decreased 1.5 / 2 1 = 25.00%.
Alternatively, the absolute price of bread increased 100%, and the absolute price of m uffins increased 66.7%,
so the relative price of bread increased and the relative price of m uffins decreased.
Part B: The dem and curves for bread and m uffin rem ain the sam e in real term s.
Part C: The relative quantity of bread decreases from 2000 to 2010. Its relative price increases com pared to
m uffins, so the inflation index that puts m ore weight on bread shows the higher inflation rate. Index Y uses
the 2000 relative quantities, so it puts m ore weight on bread.
Rachel: An inflation index that uses quantities based on a m arket basket of goods at the beginning of the
period overstates inflation (as the CPI does).