ECON 141

Macroeconomics
Classwork 1

1.Define GDP and its characteristics.

2.Explain the difference between final and intermediate goods, and give an
example of each.

3.What is the value added by all the firms A–E from the production of a product as
described below? What did each firm add separately in value and what does it
total?

Stage of production Sales value of product

Firm A $1610
Firm B 2500
Firm C 3700
Firm D 5200
Firm E 7600

4. Which of the following are included and which are excluded in calculating this
year’s GDP? Explain in each instance.

(a) A monthly scholarship check received by an economics student

(b) The purchase of a new truck by a trucking company

(c) Government purchase of missiles from a private business

(d) The purchase of a used tractor by a farmer

(e) The value of the purchase of shares of Microsoft by an individual

5. Consider the following data (in billion $) for Canada in 2014, what is the
GDP:
 Item Billions of $
Wages paid to labor 685
Consumption Expenditure 791
Taxes 394
Transfer Payments 198
Profits 273
Investment 209
Government Purchases 267
Exports 322
Savings 38
Imports 366

6. The table below shows the values for several different components of GDP.

Category Billions of Dollars

Personal consumption expenditures $245
Net foreign factor income 4
Transfer payments 12
Rents 14
Consumption of fixed capital (depreciation) 27
Statistical discrepancy 8
Social Security contributions 20
Interest 13
Proprietor's income 33
Net exports 11
Dividends 16
Compensation of employees 223
Taxes on production and imports 18
Undistributed corporate profits 21
Personal taxes 26
Corporate income taxes 19
Corporate profits 56
Government purchases 72
Net private domestic investment 33
Personal saving 20
Imports 15

a) What is the value of exports?

b) What is the value of national income?
c) What is the GDP using the income approach?
d) What is the GDP using the expenditures approach?
e) What is the value of personal income?
7. The following is a list of figures for a given year in billions of dollars. Using
this data, compute: (a) GDP; (b) NDP; (c) NI; (d) PI; (e) DI; (f) Net exports.
Item Billions of dollars
Transfer payments $ 16
Government purchases 80
Personal taxes 38
Corporate income taxes 28
Social Security contributions 8
Undistributed corporate profits 19
Proprietors’ income 25
Compensation of employees 258
Personal consumption expenditures 322
Consumption of fixed capital 4
Rents 10
U.S. Exports 14
Corporate profits 70
Interest 12
Dividends 23
Imports to U.S. 17
Gross private domestic investment 63
Net foreign factor income 10
Statistical discrepancy 35

8. The next four questions refer to the following price and output data over a
five-year period for an economy that produces only one good. Assume that
year 2 is the base year.

Year Units of output Price per unit

1 16 $2
2 20 3
3 30 4
4 36 5
5 40 6

(a) If year 2 is the base year, give the price index for year 3.
(b) Give the nominal GDP for year 4.
(c) What is the real GDP for year 4?
(d) Tell which years you would deflate nominal GDP and which years you would
inflate nominal GDP in finding real GDP.
9. The following table shows the price of a specific stereo receiver for a five-
year period. Using year 3 as the base year, calculate the price index for
each year.

Year Price Price index

1 $ 88 _____
2 $100 _____
3 $120 _____
4 $132 _____
5 $140 _____

10.The following data show nominal GDP and the appropriate price index for
several years. Compute real GDP for each year and indicate whether you
have “inflated” or “deflated” nominal GDP in finding real GDP. All GDP are
in billions.

Inflated (I)
Year Nominal GDP Price level index Real GDP
Deflated (D)
1 $117 120 _____ _____
2 124 104 _____ _____
3 143 85 _____ _____
4 149 96 _____ _____
5 178 112 _____ _____
6 220 143 _____ _____
Solutions:

1. Define GDP and its characteristics.

GDP is the total market value of all final goods and services produced within the borders
of a given country in a given period of time, typically a year. It is a monetary measure
that excludes non-productive transactions, such as the value of stock or bond sales, the
sales of used goods, and public or private transfer payments. GDP is a measure of value
added. It avoids multiple counting by measuring the value of final goods and services
and excludes the value of intermediate goods.

2.Explain the difference between final and intermediate goods and give an
example of each.

Final goods are consumption goods, capital goods, and services that are purchased by
their final users, rather than for resale or for further processing or manufacturing. The
textbook example of a final good is the wool suit bought from a retail store by one of its
customers. “Intermediate goods” are goods produced during the year that will be used
in the production of something else. In the wool suit example, the value of the wool sold
by the sheep rancher was not counted when it was sold to the cloth manufacturer
because it would be used in the process of producing the cloth and later the suit. In
other words, at the wool stage, the product had not reached its final point of sale for
that year.
Other examples would include all sorts of raw materials and wholesale goods as
intermediate goods. Any consumer purchase of a good or service domestically
produced in the given year would be a final expenditure in the GDP accounts.

3.What is the value added by all the firms A–E from the production of a product as
described below? What did each firm add separately in value and what does it
total?

Stage of production Sales value of product

Firm A $1610
Firm B 2500
Firm C 3700
Firm D 5200
Firm E 7600

The value added by all firms is $7600, or the final sales value. Firm A: added $1610.
Firm B: added $910. Firm C: added $1200. Firm D: added: $1510. Firm E: added $2400.
The value added by all firms totals $7600 and equals the final sales value by Firm E
($7600).

4.Which of the following are included and which are excluded in calculating this
year’s GDP? Explain in each instance.
(a) A monthly scholarship check received by an economics student
(b) The purchase of a new truck by a trucking company
(c) Government purchase of missiles from a private business
(d) The purchase of a used tractor by a farmer
(e) The value of the purchase of shares of Microsoft by an individual

(a) Scholarships are not included in GDP. They are viewed as financial transactions
and would be either a public or private transfer payment depending on the
source of funds. They are awards for past performance and would not be
included in current production. They don’t represent income earned by
providing a productive resource as defined in the GDP accounts.
(b) The truck is included because it represents investment. It is a final good that was
produced in the current year.
(c) The missile purchase is included as part of government spending on goods and
services.
(d) The used tractor is not included because it was counted when it was new.
(e) The value of a stock purchase is not included because it is just a swap of paper
assets.

5.Consider the following data (in billion $) for Canada in 2014, what is the GDP:
Item Billions of $
Wages paid to labor 685
Consumption Expenditure 791
Taxes 394
Transfer Payments 198
Profits 273
Investment 209
Government Purchases 267
Exports 322
Savings 38
Imports 366

According to the Expenditure Approach:

GDP = C + I + G + (X – M) = 791 + 209 + 267 + (322 – 366) = 1,223 billion $
6.The table below shows the values for several different components of GDP.
 
Category Billions of Dollars
Personal consumption expenditures $245
Net foreign factor income 4
Transfer payments 12
Rents 14
Consumption of fixed capital (depreciation) 27
Statistical discrepancy 8
Social Security contributions 20
Interest 13
Proprietor's income 33
Net exports 11
Dividends 16
Compensation of employees 223
Taxes on production and imports 18
Undistributed corporate profits 21
Personal taxes 26
Corporate income taxes 19
Corporate profits 56
Government purchases 72
Net private domestic investment 33
Personal saving 20
Imports 15

a) What is the value of exports?

b) What is the value of national income?
c) What is the GDP using the income approach?
d) What is the GDP using the expenditures approach?
e) What is the value of personal income?

a) Net exports = exports – imports. Exports ($26 billion) = net exports ($11
billion) + imports ($15 billion).

b) National income ($357 billion) = compensation of employees ($223 billion) +

rents ($14 billion) + interest ($13 billion) + proprietors' income ($33 billion) +
corporate profits ($56 billion) + taxes on production and imports ($18 billion).
 c) GDP ($388 billion) = national income ($357 billion) – net foreign factor income
($4 billion) + consumption of fixed capital ($27 billion) + statistical discrepancy
($8 billion). Note that GDP can also be computed using the expenditures
approach, where GDP = personal consumption expenditures ($245 billion) +
gross private expenditure ($33 billion + $27 billion) + government purchases
($72 billion) + net exports ($11 billion). 

d) Personal income ($291 billion) = national income ($357 billion) – taxes on

production and imports ($18 billion) – Social Security contributions ($20
billion) – corporate income taxes ($19 billion) – undistributed corporate profits
($21 billion) + transfer payments ($12 billion).

7.The following is a list of figures for a given year in billions of dollars. Using this
data, compute: (a) GDP; (b) NDP; (c) NI; (d) PI; (e) DI; (f) Net exports.

Items Billions of dollars

Transfer payments $ 16
Government purchases 80
Personal taxes 38
Corporate income taxes 28
Social Security contributions 8
Undistributed corporate profits 19
Proprietors’ income 25
Compensation of employees 258
Personal consumption expenditures 322
Consumption of fixed capital 4
Rents 10
U.S. Exports 14
Corporate profits 70
Interest 12
Dividends 23
Imports to U.S. 17
Gross private domestic investment 63
Net foreign factor income 10
Statistical discrepancy 35

(a) GDP $462; (b) NDP $458; (c) NI $433; (d) PI $379; (e) DI $341; (f) Net exports −
$3.
8.The next four questions refer to the following price and output data over a five-
year period for an economy that produces only one good. Assume that year 2 is
the base year.

Year Units of output Price per unit

1 16 $2
2 20 3
3 30 4
4 36 5
5 40 6

(a) If year 2 is the base year, give the price index for year 3.
(b) Give the nominal GDP for year 4.
(c) What is the real GDP for year 4?
(d) Tell which years you would deflate nominal GDP and which years you would
inflate nominal GDP in finding real GDP.

(a) 4/3 = 1.33 for a price index of 133

(b) Nominal GDP = 36  $5 = $180
(c) Real GDP = 180/1.67 = $107.78 (approx.)
(d) You would deflate nominal GDP for years where the price index is more than
100, that is, for years 3, 4, and 5. You would inflate the nominal GDP for year 1
since the price index is less than 100 relative to the base year 2.

9. The following table shows the price of a specific stereo receiver for a five-year
period. Using year 3 as the base year, calculate the price index for each year.

Year Price Price index

1 $ 88 73
2 $100 83
3 $120 100
4 $132 110
5 $140 117

To get the price index numbers, one would divide the given year’s price by the year 3
price and multiply the result by 100 to express as a percentage in index form. So the
year 5 index is $140 divided by $120 or 1.17. Multiply 1.17  100 to get 117 expressed
in percentage.
10. The following data show nominal GDP and the appropriate price index for
several years. Compute real GDP for each year and indicate whether you have
“inflated” or “deflated” nominal GDP in finding real GDP. All GDP are in
billions.

Inflated (I)
Year Nominal GDP Price level index Real GDP
Deflated (D)
1 $117 120 $ 98 D
2 124 104 119 D
3 143 85 168 I
4 149 96 155 I
5 178 112 160 D
6 220 143 154 D

To get the answers for real GDP change the price index to percent (divide each index
by 100), then divide nominal GDP by the percent price index. For example, in year
#1, divide $117 by 1.20 to get $98 in real GDP. If the real GDP is less than the
nominal it has been deflated; if the real GDP is more than the nominal GDP it has
been inflated.