C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 1 of 31 Discussions 1. The total market value of all final goods and services produced within a given period by factors of production located within a country is A)gross domestic product B)gross national product C)net national product D)net national income

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 2 of 31 Discussions 2. Gross domestic product measures A)the total spending of everyone in the economy B)the value of all output in the economy C)the total income of everyone in the economy D) All of the above

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 3 of 31 Discussions 3. Which of the following is an example of a final good or service? A)Wheat a bakery purchases to make bread. B)Coffee beans purchased to make coffee C)Lumber purchased by a construction company to used in building houses D) A tractor purchased by a farmer to cultivate his farm

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 4 of 31 Discussions 4.Double counting can be avoided by A)including the value of intermediate goods in the current year. B)not counting the value of intermediate goods in GDP C)including the value of intermediate goods in the GNP but not in the GDP D)including the value of intermediate goods in the production year but not in the selling year of those goods

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 5 of 31 Discussions 5. Which of the following would NOT be counted in 2003's GDP? A)The value of a 2001 car you purchase from a car dealer in B)The 2003 salary of a used car salesperson C)The commissions earned by a real estate agent in selling houses built prior to 2003 D)The value of a computer manufactured in 2003 but not sold in 2003

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 6 of 31 Discussions 6. Income of Mexican citizens earned in the U.S. counts in A)U.S. GNP. B)Mexican GNP C)Mexican GDP D)All of the above

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 7 of 31 Discussions 7. The equation for GDP using the expenditure approach is A)GDP = C + I + G + EX - IM. B)GDP = C + I + G + (IM - EX). C)GDP = C + I + G + EX + IM D)GDP = C + I + G - EX - IM

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 8 of 31 Discussions 8. The change in business inventories is measured as A)final sales minus GDP. B)final sales plus GDP C)GDP minus final sales D)the ratio of final sales to GDP

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 9 of 31 Discussions 8. In 2004 final sales equal $100 billion, and the change in business inventories is $20 billion.GDP in 2004 is A)$120 billion. B)$110 billion C)$80 billion D)cannot be determined from this information

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 10 of 31 Chapter 2 - Discussion Table 1

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 11 of 38 1.Refer to Table 1, Personal consumption expenditures in billions of dollars are C = durable goods + non durable goods + services = Refer to Table 1, The value for gross private domestic investment in billions of dollars is I = Residential + Nonresidential + Changes in Inventory = Refer to Table 1, The value for net exports in billions of dollars is Net export = Export – import = 500 – 150 = 350

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 12 of Refer to Table 1 The value of government spending in billions of dollars is G = Federal purchase of goods + States and local purchase of goods = GDP = = Refer to Table 1 The value of gross domestic product in billions of dollars is GDP = C + I + G + (X – M) = GDP = = 2875

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 13 of 31 Chapter 2 - Discussion Table 2.

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 14 of 38 1, Refer to Table 2. The value for GDP in billions of dollars is GDP = C + I + G + x - M I = Gross investment = Net investment + depreciation = = 180 GDP = – 40 = Refer to Table 2, The value for GNP in billions of dollars is GNP = GDP + receipts of factors of production from the rest of the world – payments of factors of production to the rest of the world = – 40 = 770

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 15 of Refer to Table 2. The value for NNP in billions of dollars is NNP= GNP – Depreciation = 770 – 30 = Refer to Table 2, The value for national income in billions of dollars is National Income = NNP – Indirect taxes + subsidies National income = 740 – = 740

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 16 of Refer to Table 2. The value for PI in billions of dollars is PI = NI – amount of income not going to the households + dividends = 740 – = Refer to Table 2, The value for DPI in billions of dollars is DPI = PI – Personal taxes DPI = 760 – 90 = 670

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 17 of 38 Table 3 Million $ ItemMillion $ Item 1760 Pension premiums 1785 Net investment 0 Corporate profits taxes 960 Export 1550 Undistributed profits 350 Import 340 Social security payments to the households Net payments of factor income to the rest of the world 775 Depreciation 3250 Disposable personal income 4235 Personal income 900 Saving 12 Indirect taxes 3370 Government purchases 320 Production subsidies

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 18 of 38 1, Refer to Table 3. The value for GDP in millions of dollars is GDP = C + I + G + x - M C = DPI - Saving = = 2350 Gross investment = net investment + depreciation = = 2560 GDP = – 350 = Refer to Table 3, The value for GNP in millions of dollars is GNP = GDP + Net payments of factor income to the rest of the world = (- 890) = 8890 – 890 = 8000

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 19 of Refer to Table 3. The value for NNP in millions of dollars is NNP= GNP – Depreciation = 8000 – 775= Refer to Table 3, The value for national income in billions of dollars is National Income = NNP – Indirect taxes + subsidies National income = 7225 – = 7533

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 20 of 31 Chapter 2 - Discussion Refer to the information provided in Table 4 below to answer the questions that follow.

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 21 of 38 1, Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. The value for this economy's nominal GDP in year 1 Nominal GDP year 1 = Sum (P1 x q1) Nominal GDP Y1 Prices = pProduction = q P1 x q1Year 3Year 2Year 1Year 3Year 2Year Good x Good y 110

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 22 of 38 Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. The value for this economy's nominal GDP in year 2 Nominal GDP year 2 = Sum (P2 x q2) Nominal GDP Y2 Prices = pProduction = q P2 x q2Year 3Year 2Year 1Year 3Year 2Year Good x Good y 150

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 23 of 38 Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. The value for this economy's nominal GDP in year 3 Nominal GDP year 3 = Sum (P3 x q3) Nominal GDP Y2 Prices = pProduction = q P2 x q2Year 3Year 2Year 1Year 3Year 2Year Good x Good y 250

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 24 of 38 Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's real GDP in year 2 is Real GDP12 = (P1 x q2) Real GDP12 Prices = pProduction = q P1 x q2Year 3Year 2Year 1Year 3Year 2Year Good x Good y 135

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 25 of 38 Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's real GDP in year 3 is Real GDP 13 = (P1 x q3) Real GDP13 Prices = pProduction = q P1 x q3Year 3Year 2Year 1Year 3Year 2Year Good x Good y 178

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 26 of 38 Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 1 is the base year, the value for this economy's real GDP in year 1 is Real GDP 11 = (P1 x q1) Real GDP11 Prices = pProduction = q P1 x q1Year 3Year 2Year 1Year 3Year 2Year Good x Good y 110

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 27 of 38 Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 2 is the base year, the value for this economy's real GDP in year 1 is Real GDP21 = (P2 x q1) Real GDP21 Prices = pProduction = q P2 x q1Year 3Year 2Year 1Year 3Year 2Year Good x Good y 125

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 28 of 38 Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 2 is the base year, the value for this economy's real GDP in year 2 is Real GDP22 = (P2 x q2) Real GDP22 Prices = pProduction = q P2 x q2Year 3Year 2Year 1Year 3Year 2Year Good x Good y 150

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 29 of 38 Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 2 is the base year, the value for this economy's real GDP in year 3 is Real GDP23 = (P2 x q3) Real GDP23 Prices = pProduction = q P2 x q3Year 3Year 2Year 1Year 3Year 2Year Good x Good y 197.5

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 30 of 38 Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 3 is the base year, the value for this economy's real GDP in year 1 is Real GDP31 = (P3 x q1) Real GDP31 Prices = pProduction = q P3 x q1Year 3Year 2Year 1Year 3Year 2Year Good x Good y 160

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 31 of 38 Refer to Table 4. Assume that this economy produces only two goods Good X and Good Y. If year 3 is the base year, the value for this economy's real GDP in year 2 is Real GDP32 = (P3 x q2) Real GDP32 Prices = pProduction = q P3 x q2Year 3Year 2Year 1Year 3Year 2Year Good x Good y 190

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 32 of 38 Calculate GDP Deflator and Inflation in the following cases If year 1 is the base year, the value of GDP deflator in year 2 ( P2.q2 / P1.q2) x 100( Nominal GDP in Y2 / Real GDP12) x 100 = ( 150 / 135 ) x 100 = If year 2 is the base year, the value of GDP deflator in year 1 ( P1.q1 / P2.q1 ) x 100( Nominal GDP in Y1 / Real GDP22 ) x 100 ( 110 / 150 ) x 100 = 73.3 In this case the Inflation rate between year 1 and 2 = ـــ 100 = 11.1 %

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 33 of 38 Calculating GDP Deflator and Inflation If year 1 is the base year, the value of GDP deflator in year 1 ( P1.q1 / P1.q1 ) x 100( Nominal GDP in Y1 / Real GDP11) x 100 ( 110 / 110 ) x 100 = 100 If year 2 is the base year, the value of GDP deflator in year 2 ( P2.q2 / P2.q2 ) x 100( Nominal GDP in Y2 / Real GDP 22) x 100 ( 150 / 150 ) x 100 = 100

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 34 of 38 Calculate GDP Deflator and Inflation in the following cases If year 1 is the base year, the value of GDP deflator in year 3 ( P3.q3 / P1.q3) x 100( Nominal GDP in Y3 / Real GDP13) x 100 = ( 250 / 178 ) x 100 = If year 3 is the base year, the value of GDP deflator in year 1 ( P1.q1 / P3.q1 ) x 100( Nominal GDP in Y1 / Real GDP 31 ) x 100 ( 250 / 160 ) x 100 = In this case the Inflation rate between year 1 and 3 = ـــ 100 = 40.4%

C H A P T E R 17: Introduction to Macroeconomics © 2004 Prentice Hall Business PublishingPrinciples of Economics, 7/eKarl Case, Ray Fair 35 of 31 Discussions The GDP deflator is the A)difference between real GDP and nominal GDP multiplied by 100. B)difference between nominal GDP and real GDP multiplied by 100 C)ratio of nominal GDP to real GDP multiplied by 100 D)ratio of real GDP to nominal GDP multiplied by 100