1.

a. Consumption increases – spending on good (a new refrigerator) by household (Uncle Fester)

b. Investment increases – investment in structures (new house)
c. GDP is not affected – nothing new is produced
d. Consumption increases – spending on service (haircut) by household (you)
e. Consumption increases – spending on goods (a Mustang) by household (Martinez family)
f. Investment increases - spending on good (a Focus) that will be used in the future (car
rental) to produce more goods
g. Government purchases increase – spending by government to produce a good (Highway 66)
for public
h. GDP is not affected – GDP excludes transfer payments
i. Consumption increases – spending on good (wine) by household; net export decreases – the
good was imported (French wine)
j. Investment increases – investment in structure (factory)
2.

Year Real GDP (in 2000 Nominal GDP (in GDP deflator (base
dollars) current dollars) year 2000)
1970 3000 1200 40
1980 5000 3000 60
1990 6000 6000 100
2000 8000
2010 30000 15000 200
2020 10000 30000 300
2030 20000 50000 250
3.

GDP is the market value of final goods and services, therefore, transfer payments are excluded from
GDP because they don’t represent a purchase of goods or services.

4.

The value of used goods is not included in GDP because they have already been counted in GDP
when they were first sold. Including them in GDP means that we are counting that goods twice and
so on.

5.
a.
 2020 : Nominal GDP : 100 x $1 + 50 x $2 = 200$
Real GDP : 100 x $1 + 50 x $2 = 200$
GDP deflator : 100 x 200/200 = 100
 2021 : Nominal GDP : 200 x $1 + 100 x 2$ = 400$
Real GDP : 200 x $1 + 100 x 2$ = 400$
GDP deflator : 100 x 400/400 = 100
 2022 : Nominal GDP : 200 x 2$ + 100 x 4$ = 800$
Real GDP : 200 x 1$ + 100 x 2$ = 400$
GDP deflator : 100 x 800/400 = 200
 b.

Year Change in GDPn Change in GDPr Change in dGDP

2020-2021 100% 100% 0%
2021-2022 100% 0 100%

2020-2021 : Prices didn’t change => dGDP didn’t change

2021-2022 : Quantities didn’t change => GDPr didn’t change

c. Economic well-being rose more in 2021 than in 2022 because real GDP rose in 2021 but not
in 2022.
6.
a. Nominal GDP
 Year 1 : 3 x 4$ = 12$
 Year 2 : 4 x 5$ = 20$
 Year 3 : 5 x 6$ = 30$
b. Real GDP
 Year 1 : 3 x 4$ = 12$
 Year 2 : 4 x 4$ = 16$
 Year 3 : 5 x 4$ = 20$
c. GDP deflator
 Year 1 : 100 x 12/12 = 100
 Year 2 : 100 x 20/16 = 125
 Year 3 : 100 x 30/20 = 150
d. (20$ - 16$)/16% x 100 = 25%
e. (150 – 125)/125 x 100 = 20%
f. To answer part (d) we just need to calculate the percentage change in quantity
To answer part (e) we just need to calculate the percentage change in price
7.
a. 100 x [(20,501/9,063)1/20 -1] = 4.17%
b. 100 x [(110.4/75.3)1/20 -1] = 1.93%
c. 12036
d. 18570
e. 2.19%
f. Higher because of inflation
8.
9.
a. The GDP in this economy is the market price of the final good sold which is 180$
b. Value added to farmer is 100$
Value added to miller is 150$ - 100$ = 50$
Value added to baker is 180$ - 150$ = 30$
c. Total value added of three producers is 100$ + 50$ + 30$ = 180$ . This is equals to this
economy’s GDP
10.
People in countries like Indie produce and consume a fair amount of food at home that isn’t
included in GDP. Therefore, GDP per person in India and the United States will be different by more
than their economic well-being.

11.
a. More products were produced since there was a larger labour force
b. The measure of well-being would not rise as much as the GDP since women participating in
the labour force will reduced time spent working in the home and taking leisure
c.
12.
a. GDP = 400$
b. Net national product = GDP – equipment depreciation = 350$
c. National income = net national product – sales taxes = 330$
d. Personal income = national income – retention in bussiness = 220$
e. Disposable personal income = personal income – income taxes = 150$