Chapter 3. The Macroeconomic Perspective

# SOLUTIONS TO SELF-CHECK QUESTIONS

3.1 Measuring the Size of the Economy: Gross Domestic Product

1. GDP is C + I + G + (X–M). GDP= \$2,000 billion + \$50 billion + \$1,000 billion + (\$20 billion – \$40 billion)=\$3,030
1. Changes in life expectancy are not market transactions and not part of GDP.
2. Child care that is paid for is part of GDP.
3. If Grandma gets paid, it is part of GDP, otherwise not.
4. A used car is not produced this year, so it is not part of GDP.
5. A new car is part of GDP.
6. Variety does not count in GDP, where the cheese could all be cheddar.
7. The iron definitely gets counted in GDP, but the trick is to avoid counting it more than once, so it is usually counted just in the purchase price of the car to avoid double counting.

3.2 Adjusting Nominal Values to Real Values

1. From 1980 to 1990, nominal GDP grew by (5979.6 – 2862.5) / (2,862.5/100) =109%. Over the same period, prices increased by (72.7 – 48.3) / (48.3/100) = 50.5%. So about 46% of the growth (50.5/109) was inflation, and the remainder: 109% – 46% = 63% was growth in real GDP.

3.3 Tracking Real GDP over Time

1. Two other major recessions are visible in the figure as slight dips: those of 1973–1975, and 1981–1982. Two other recessions appear in the figure as a flattening of the path of real GDP. These were in 1990–1991 and 2001.
2. 11 recessions in approximately 70 years averages about one recession every six years.
3. Averaging the figures from Table 3.7 for the post-WWII recessions gives an average duration of 11 months, or slightly less than a year.
4. Averaging the figures from Table 3.7 for the post-WWII expansions gives an average expansion of 60.5 months, or more than five years.

3.4 Comparing GDP among Countries

1. Yes. The answer to both questions depends on whether GDP is growing faster or slower than population. If population grows faster than GDP, GDP increases, while GDP per capita decreases. If GDP falls, but population falls faster, then GDP decreases, while GDP per capita increases.
2. Start with Central African Republic’s GDP measured in francs. Divide it by the exchange rate to convert to U.S. dollars, and then divide by population to obtain the per capita figure. That is, 1,107,689 million francs / 284.681 francs per dollar / 4.862 million people = \$800.28 GDP per capita.

3.5 How Well GDP Measures the Well-Being of Society

1. A dirtier environment would reduce the broad standard of living, but not be counted in GDP, so a rise in GDP would overstate the standard of living.
2. A lower crime rate would raise the broad standard of living, but not be counted directly in GDP, and so a rise in GDP would understate the standard of living.
3. A greater variety of goods would raise the broad standard of living, but not be counted directly in GDP, and so a rise in GDP would understate the rise in the standard of living.
4. A decline in infant mortality would raise the broad standard of living, but not be counted directly in GDP, and so a rise in GDP would understate the rise in the standard of living.