Chapter 23

1.
a. Uncle Henry’s purchasing of the new, domestically-manufactured refrigerator will
influence the consumption component of GDP.
b. Aunt Jane contributes to GDP when buying a new house. In particular, it is a
contribution to the investment component.
c. The old Victorian house that the Jacksons buy from the Walkers cannot affect the
GDP, because of two reasons. Firstly, since the house was not newly built, it was
already counted in the GDP of the year when it was constructed. Additionally, this
purchasing only involves two families and they do not produce anything new, so this is
not related to GDP.
d. My paying to have my haircut is counted in the consumption component of the GDP,
because I make payment to receive a service.
e. That Ford selling an inventory car does not increase or decrease GDP in total. As the
car was counted as Ford’s investment spending when it was put in the inventory,
investment decreases now that it is sold. Meanwhile, consumption also increases by
exactly that amount. Therefore, GDP does not change.
f. As the car Ford manufactured is sold as a capital good (Avis will use this car as a
means to make more money, then to buy more goods and services), we will see an
increase in investment, so GDP also witnesses a rise.
g. Using money to repave the highway is how the government spends on goods and
services for its citizens, so the government purchases component increases in this
case.
h. When my grandmother is sent a Social Security check, this is a transfer payment -
the government pays but in no exchange for any goods or services. Hence, no changes
happen to GDP.
i. My parents’ purchasing increases consumption, but that decreases net exports as
well, since the wine bottle was not made inside the USA. In conclusion, we see no
change in GDP.
j. Expanding a factory implies purchasing new equipment and spending on new
infrastructure. So investment escalates, so does GDP.

2. Table:
3. Transfer payments cannot be counted in GDP, as when the government makes
these, there is nothing being produced. Also, no goods or services currently produced
are exchanged.

4. Resold products’ value being included in GDP will result in a repeated double-
counting process, as this value will be counted in any year the used goods are on sale.
Money is only transferred from one person to another, which causes total expenditure to
be wrongly computed. In this case, GDP cannot be an effective measure of the
economy’s well-being in a specific period.

5.

c. Economic well-being saw a more impressive increase in 2017, as price remained

unchanged, but quantity increased from 100 to 200 quarts of milk and 50 to 100 quarts
of honey. This increased the real GDP. However, in 2018, only price increased while
quantity did not change, which indicated inflation.
6.

f. In a one-good economy, we can calculate the inflation rate by only using price to
compute.
7.

f. The growth rate of nominal GDP is higher than that of real GDP. This is caused by
inflation.

8. Both nominal and real GDP increased, but nominal GDP had a greater growth rate. In
the components of GDP, consumption made up for the most, while government
purchases finished second and investment came last. Net exports were negative.

9.
a. The market value of the final goods produced (which is bread) is GDP. So this
economy’s GDP is $180.
b. For the farmer: $100.
For the miller: $150 – $100 = $50.
For the baker: $180 – $150 = $30
c. The value added for all three producers in this economy in total is $100 + $50 + $30 =
$180. This is the value of GDP.

10. Self-producing and consuming a quite large quantity of food (which is not counted in
GDP) without the intention of selling on the market is a characteristic of people in some
countries, such as India. This consequently will create a larger gap between GDP per
person in India and that in the United States than between each country’s economic
well-being.

11.
a. GDP in the United States has increased thanks to the dramatic increase of labor-
force participation of women, as more members of the states are working and more
goods and services have been produced.
b. If time used to work in the home and to relax is included in the measure of well-being,
this would not increase as much as GDP, because increasing women's labor-force
participation results in reducing time spent working in the home and relaxing.
c. Other aspects may include better prestige for women in the workforce, yet lessened
quality time spent with children. It is difficult to determine these aspects.

12.