Answers to the Study Plan Problems and Applications

1. Classify each of the following items as a final good or service or an intermediate good
or service and identify each item as a component of consumption expenditure,
investment, or government expenditure on goods and services:
 Renault car bought by your parents for your birthday
The new Renault car is a final good. It is part of consumption expenditure.
 Weapons bought by the Russian government from a local factory
New weapons purchased by the Russian government are a final good. They are part of
government expenditure.
 Tortillas bought by a Mexican fast food stand
Tortilla bought by the Taco stand are intermediate goods that are used for the final product,
the taco. The value of the Tortilla is not included in the GDP in order to avoid the problem
of double counting.
 Glass bottles purchased by Perrier
These glass bottles are intermediate goods that are used for the final good that is bottled
sparkling water. The value of the empty glass bottles is not counted in the GDP in order to
avoid the problem of double counting.
 New house in a Caribbean island bought by Argentina’s president
A new house purchased by Argentina’s president is a final good. It is part of investment.

Use the following figure illustrates the circular flow model.

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2. During 2014, flow A was $13.0 trillion, flow B was $9.1 trillion, flow D was $3.3
trillion, and flow E was –$0.8 trillion. Calculate (i) GDP and (ii) Government
expenditure.
(i) Flow A is aggregate income. GDP equals aggregate income, so GDP is $13.0 trillion.
(ii) Government expenditure is $1.4 trillion. Aggregate expenditure equals GDP, which from part
(i) is $13.0 trillion. Aggregate expenditure is the sum of consumption expenditure (Flow B),
investment (Flow D), government expenditure (Flow C), and net exports (Flow E). Therefore
government expenditure equals aggregate expenditure minus consumption expenditure minus
investment minus net exports. Government expenditure equals $13.0 trillion minus $9.1
trillion minus $3.3 trillion minus $0.8 trillion, which is $1.4 trillion.

3. Use the following data to calculate aggregate income and exports of goods and
services.
 Consumption expenditure: ¥85 billion
 Government expenditure: ¥27 billion
 Aggregate expenditure: ¥129 billion
 Investment: ¥33 billion
 Imports of goods and services: ¥40 billion
Aggregate income equals aggregate expenditure, so aggregate income equals ¥129 billion.
Aggregate expenditure also equals consumption expenditure plus investment plus
government expenditures on goods and services plus exports of goods and services minus
imports of goods and services, so exports of goods and services equals aggregate
expenditure minus consumption expenditure minus investment minus government
expenditure on goods and services plus imports. Using this formula gives exports of goods
and services which equals ¥129 billion - ¥85 billion - ¥27 billion - ¥33 billion + ¥40 billion,
which is ¥24 billion.

4. The table lists some national

Item Billions of
accounts data for the United dollars
States in 2014. Wages 9,109
Consumption expenditure 11,729
a. Calculate U.S. GDP in 2014.
Other factor incomes 4,173
GDP equals consumption Investment 2,714
expenditure plus investment Government expenditure 3,139
Net exports −538
plus government
Depreciation 2,699
expenditure plus net
exports, so GDP equals $11,729 billion + $2,714 billion + $3,139 billion − $538 billion, or
$17,044 billion.

b. Explain the approach (expenditure or income) that you used to calculate GDP.
The expenditure approach was used.

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Use the following data to work Problems 5 and 6.
Tropical Republic produces Quantities 2016 2017
only bananas and coconuts. Bananas 800 bunches 900 bunches
Coconuts 400 bunches 500 bunches
The base year is 2016, and
the tables give the quantities Prices 2016 2017
produced and the prices. Bananas $2 a bunch $4 a bunch
Coconuts $10 a bunch $5 a bunch
5. Calculate nominal
GDP in 2016 and 2017.
In 2016, nominal GDP is $5,600. In 2017, nominal GDP is $6,100.
Nominal GDP in 2016 is equal to total expenditure on the goods and services produced by
Tropical Republic in 2016. Expenditure on Tropical Republic on bananas is 800 bunches of
bananas at $2 a bunch, which is $1,600. Expenditure on coconuts is 400 bunches at $10 a
bunch, which is $4,000. Total expenditure is $5,600, so nominal GDP in 2016 is $5,600.
Nominal GDP in 2017 is equal to total expenditure on the goods and services produced by
Tropical Republic in 2017. Expenditure on Tropical Republic on bananas is 900 bunches of
bananas at $4 a bunch, which is $3,600. Expenditure on coconuts is 500 bunches at $5 a
bunch, which is $2,500. Total expenditure is $6,100, so nominal GDP in 2017 is $6,100.

6. Calculate real GDP in 2017 expressed in base-year prices.

Real GDP in 2017 using base-year prices is $6,800. The base-year prices method calculates
the market value of the 2017 quantities at the base-year prices of 2016. To value the 2017
output at 2016 prices, real expenditure on Tropical Republic on bananas is 900 bunches at
$2 a bunch, which is $1,800, and real expenditure on coconuts is 500 bunches at $10 a
bunch, which is $5,000. Adding these two expenditures shows that real GDP in 2017 using
the base-year prices method is $6,800.

7. Use the table to work out in which year the U.S. standard of living (i) increases and (ii)
decreases. Explain your answer.
The standard of living is measured Year Real GDP Population
by real GDP per person. The 2006 $13.0 trillion 300 million
2007 $13.2 trillion 302 million
standard of living increased in 2007
2008 $13.2 trillion 304 million
because real GDP per person 2009 $12.8 trillion 307 million
increased. The standard of living
decreased in 2008 and 2009 because in both years real GDP per person decreased.

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8. An agricultural economy
Quantities 2016 2017
produces only potatoes Potatoes 2,000 tons 2,300 tons
and tomatoes. Calculate Tomatoes 900 tons 1,000 tons
the country’s chained- Prices
euro real GDP in 2017 Potatoes €27 a ton €33 a ton
Tomatoes €14 a ton €12 a ton
expressed in 2016 euros.
Real GDP in 2017 is €76,160.43. The chained-dollar method uses the prices of 2016 and 2017 to
calculate the growth rate in 2017. The value of the 2016 quantities at 2016 prices is €66,600. The value
of the 2017 quantities at 2016 prices is 2,300 tons of potatoes × €27 a ton + 1,000 tons of tomatoes ×
€14 a ton, which is €76,100. Using 2016 prices, the increase in GDP for these two years is €9,500, so
the percentage increase is (€9,500  €66,600)  100, which is 14.26 percent.

Next the value of the 2016 quantities at 2017 prices is 2,000 tons of potatoes × €33 a ton +
900 tons of tomatoes × €12 a ton, which is €76,800. The value of the 2017 quantities at
2017 prices is €87,900. Using 2017 prices, the increase in GDP for these two years is €11,
100 so the percentage increase is (€11,100 ÷ €76,800) × 100, which is 14.45 percent.

The chained dollar method calculates the growth rate as the average of these two percentage
growth rates, which means that the growth rate in 2017 is 14.355 percent. So real GDP in
2017 is equal to €66,600, which is real GDP in the base year (and is equal to nominal GDP
in that year) multiplied by one plus the growth rate or 1.14355. Real GDP in 2017 is
€76,160.43.