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Chapter 8: Q. 5 (page 185)

Consider the following hypothetical data for the U.S. economy in 2020(all amounts are in trillions of dollars).

a. Based on the data, what is GDP? NDP? NI?

b. Suppose that in 2021, exports fall to \(2.3trillion, imports rise to \)2.85trillion, and gross private domestic investment falls to $3.25trillion. What will GDP be in 2021, assuming that other values do not change between 2020and 2021?

Short Answer

Expert verified

Option a is

As a result, GDP=$18.6trillion, NDP=$17.3trillion, andNI=$16.5trillion are the values.

Option b is

As a result, the final GDP number is$17.7trillion.

Step by step solution

01

    Explanation of option a

The expenditure approach to GDP calculation adds up consumption, gross private investment, government purchases, and net exports. Add these numbers together to get the current value of GDP:

GDP=C+I+G+NX=11+3.8+4+2.5-2.7=18.6

02

Step 2:      Difference between GDP and depreciation

NDP is the difference between GDP and depreciation

NDP=GDP-Depreciation=18.6-1.3=17.3

The national income for this section is NDP minus indirect taxes, which equals . As a result,GDP=$18.6trillion, NDP=$17.3trillion, andNI=$16.5trillion are the values.

03

    Explanation of option b

b) In 2019, the GDP number will be:

GDP=C+I+G+NX=11+3.25+4+2.3-2.85=17.7

As a result, the final GDP number is $17.7trillion.

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Most popular questions from this chapter

Which of the following are production activities that are included in GDP? Which are not?

a. Mr. King performs the service of painting his own house instead of paying someone else to do it.

b. Mr. King paints houses for a living.

c. Mrs. King earns income from parents by taking baby photos in her digital photography studio.

d. Mrs. King takes photos of planets and stars as part of her astronomy hobby.

e. E⋆Trade charges fees to process Internet orders for stock trades.

f. Mr. Ho spends \(10,000on shares of stock via an Internet trade order and pays a \)10brokerage fee.

g. Mrs. Ho receives a Social Security payment.

h. Ms. Hernandez makes a $300payment for an Internet-based course on stock trading.

i. Mr. Langham sells a used laptop computer to his neighbor.

Suppose that in 2019, geologists discover large reserves of oil under the tundra in Alaska. These new reserves have a market value estimated at \(50 billion at current oil prices. Oil companies spend \)1 billion to hire workers and move and position equipment to begin exploratory pumping during that same year. In the process of loading some of the oil onto tankers at a port, one company accidentally spills some of the oil into a bay and by the end of the year pays $1 billion to other companies to clean it up. The oil spill kills thousands of birds, seals, and other wildlife. What was the combined effect of these events on GDP for this year? (Hint: Which transactions took place in the markets for final goods and services?) In what ways, if any, does the effect on GDP reflect a loss in national welfare?

In the first stage of manufacturing each final unit of a product, a firm purchases a key input at a price of \(4 per unit. The firm then pays a wage rate of \)3 for the time that labor is exerted, combining an additional \(2 of inputs for each final unit of output produced. The firm sells every unit of the product for \)10. What is the contribution of each unit of output to GDP in the current year?

Suppose that early in a year, a hurricane hits a town in Florida and destroys a substantial number of homes. A portion of this stock of housing, which had a market value of \(100 million (not including the market value of the land), was uninsured. The owners of the residences spent a total of \)5 million during the rest of the year to pay salvage companies to help them save their remaining belongings. A small percentage of uninsured owners had sufficient resources to spend a total of \(15million during the year to pay construction companies to rebuild their homes. Some were able to devote their own time, the opportunity cost of which was valued at \)3 million, to work on rebuilding their homes. The remaining people, however, chose to sell their land at its market value and abandon the remains of their houses. What was the combined effect of these transactions on GDP for this year? (Hint: Which transactions took place in the markets for final goods and services?) In what ways, if any, does the effect on GDP reflect a loss in welfare for these individuals?

Consider the diagram below, and answer the following questions.

a. What is the base year? Explain.

b. Has this country experienced inflation or deflation since the base year? How can you tell?
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