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Chapter 4 Tutorial Problem Set Answers
Macroeconomics (ECF1200)
Monash University
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Chapter 4 Tutorial Problem Set Answers
1. Please watch this clip from Justin Timberlake.
You can find this video under Chapter 4 Tutorial Resources on Moodle.
In the song, Timberlake sings the following: “What goes around, goes around, goes around, comes all the way back around.”
What concept in Macroeconomics does this illustrate?
Answer: Circular flow of income. The circular-flow diagram illustrates the flow of transactions in the economy. The income generated in the production of goods and services is equal to the value of expenditure on these goods and services.
2. In the following situations, explain whether the item is counted or not counted in this year’s GDP.
A) You bought the latest PlayStation model at GameStop last year and resold it on eBay this year.
Answer: When you bought the new Wii last year, the market value of the Wii was included in last year’s GDP. However, when you sell it on eBay this year, it is not included in this year’s GDP because GDP only includes new, not used, final goods and services.
B) You purchase a new copy of Investing for Dummies at Barnes and Noble.
Answer: Because you purchased the book new, this is included in GDP.
C) You purchase a historic home.
Answer: The value of the home is not included in GDP because it is “historic” and therefore used.
D) You clean your car so it is spotless inside and out.
Answer: This is not included in GDP because it is non-market production. Though you have provided yourself with a service, no one was paid for the service.
E) You purchase a new hard drive for your old laptop.
Answer: The market value of the new hard drive is included in GDP, but the value of your old laptop is not. The value of your laptop was included in GDP when you bought it new.
F) Your physical therapist receives $300 for physical therapy but reports only $100.
Answer: If your therapist only reports $100, only that $100 is included in GDP. Because your therapist does not report the remaining $200, this amount is part of the underground economy, which is not included in GDP.
G) Apple buys 1,000 motherboards for use in making new computers.
Answer: The motherboards are not included in GDP because they are an intermediate good. Apple is not selling the motherboards directly to consumers; instead Apple is combining them with other parts to build whole computers, which the company will then sell to consumers. The value of the computers (that contain the motherboards) will be included in GDP.
3. Are the following items intermediate or final goods?
A) A litre of milk purchased by you at the supermarket.
Answer: Final good.
B) A litre of milk purchased by Starbucks for their cappuccinos.
Answer: Intermediate good. The milk is not sold to consumers; instead it is a component of cappuccinos which is sold as the final good.
C) A computer you bought to surf the internet.
Answer: Final good.
D) A computer bought by your university for use in the library.
Answer: Final good. The computer is considered a capital good (I).
E) A tractor bought by your local council government to mow grass.
Answer: Final good.
F) A tractor bought by farmer Glenn to plough his corn fields.
Answer: Final good.
G) Corn seed used by farmer Glenn to grow corn.
Answer: The corn seed is an intermediate good. Farmer Glenn is planting it to grow corn, which he will then sell.
Retail sale 1 0. $1.
A) The value added is the difference between the price the firm sells a good for and the price it paid other firms for the intermediate good. The firm that does the oil drilling sells the litre of oil to the refinery for $0. Since we are assuming no other input costs for simplicity, the value added by the drilling firm is $0. The refinery processes the oil and then sells it to the transport company for $1. The refinery’s value added is $0. The transport company sells the oil to the retail company for $1. The transport company’s value added is $1 - $1 = $0. Finally, the retail petrol station sells the litre of petrol for $1. The value added by the petrol station is $0..
B) The total value added is found by summing the value added by each firm involved in the production of the litre of petrol. The retail price is the same as this total of value added.
C) Same as the total value added: $1. To use a shortcut, look at the retail price.
6. Which component of GDP expenditure (C, I, G or NX) does each of the following belong?
A) Swiss chocolates imported from Europe.
Answer: The chocolates are imports. NX equals X – M, so the value of chocolates would be subtracted from GDP.
B) A candle you buy at a local store.
Answer: This is included in C. You buy the candle for your personal consumption.
C) A family buys a new house to live in.
Answer: This is included in I
D) The Victorian government builds a new rail link to the airport.
Answer: This is included in G.
The OECD (Organisation for Economic Cooperation and Development) publishes data on the average annual hours worked.
data.oecd/emp/hours-worked.htm
7. Leisure time is not included in GDP, but what would happen if it was included? Would high-work countries like South Korea fare better in international comparison of well-being, or worse?
Answer: If leisure time were included in GDP, then high-work countries like South Korea (1,908 annual hours per worker or 36 hours per week) would appear worse off in international comparisons of well-being. Having more leisure time makes people better off, which means that leisure time is a positive contribution to GDP. Therefore, countries that work less (and have more leisure time), such as Germany (1,332 annual hours per worker or 25 hours per week), would get a bigger boost to their GDP than would countries like South Korea. This would make low-work countries look better and high-work countries look worse in comparison.
8. Each year the United Nations publishes the Human Development Report, which provides information on the standard of living in nearly every country in the world. The report can be found here: hdr.undp/sites/default/files/hdr2019.pdf
The report includes data on real GDP per capita, but also contains a broader measure of the standard of living called the Human Development Index (HDI). The HDI combines data on real GDP per capita with data on life expectancy at birth, adult literacy and school enrolment. The following table shows values for real GDP per capita and the HDI for several countries. Prepare one list ranking countries from highest real GDP per capita to lowest, and another list ranking countries from highest HDI to lowest. Briefly
A) In India, a greater portion of workers produce non-market output.
Answer: When a lot of workers produce non-market output, the goods and services they supply fail to get included in GDP. This will cause measured GDP to underestimate the standard of living.
B) In China, the air pollution is much greater.
Answer: Air pollution detracts from quality of life, but when the contribution of industry to GDP is counted up, the pollution industry creates is not factored in. This will cause measured GDP to overestimate the standard of living.
C) In Greece, many transactions occur in the underground economy – more than in Australia, for example.
Answer: An underground economy represents a lot of goods and services being exchanged without the government’s economists keeping track. Those goods and services will not get included in GDP. This will cause measured GDP to underestimate the standard of living.
D) In France, the average work week is shorter than in Australia.
Answer: If the French have more hours of leisure, that is, a non-monetary form of income that improves quality of life without counting towards GDP, then this will cause measured GDP to underestimate the standard of life.
10. Consider an economy that only produces two goods: strawberries and cream. Use the following table to compute nominal GDP, real GDP, and the GDP deflator for each year. (Year 2019 is the base year).
Year Price of Strawberries (per kg)
Quantity of Strawberries (kg)
Price of cream (per kg)
Quantity of cream (kg) 2019 $3 100 $2 200 2020 $4 125 $2 400 2021 $5 150 $3 500
Answer: Year Nominal GDP Real GDP GDP Deflator 2019 $700 $700 100. 2020 $1,500 $1,175 127. 2021 $2,250 $1,450 155.
Nominal GDP (market P & Q) 2019 = ($3 x 100) + ($2 x 200) = $ 2020 = ($4 x 125) + ($2 x 400) = $1, 2021 = ($5 x 150) + ($3 x 500) = $2,
Real GDP (2019 prices; market Q) 2019 = ($3 x 100) + ($2 x 200) = $
2020 = ($3 x 125) + ($2 x 400) = $1, 2021 = ($3 x 150) + ($2 x 500) = $1,
GDP Deflator (nominal GDP / real GDP x 100) 2019 = $700 / $700 x 100 = 100 2020 = $1,500 / $1,175 x 100 = 127. 2021 = $2,250 / $1,450 x 100 = 155.
11. Assume that real GDP in a country grew from $2,000 in 2020 to $3,000 in 2021. Calculate the rate of economic growth over that time period.
Answer : The rate of economic growth is: [($3,000 - $2,000)/$2,000] x 100 = 50%.
12. Use the data in the following table to calculate the GDP deflator for each year (values are in billions of dollars):
Year Nominal GDP Real GDP 2017 13,300 12, 2018 14,000 13, 2019 14,300 13, 2020 13,900 12, 2021 14,600 13,
Which year from 2017 to 2021 saw the largest percentage increase in the price level as measured by the GDP deflator? Briefly explain.
Answer: The GDP deflator is calculated as [nominal GDP/real GDP] x 100. The percentage change is calculated as [(value in the second period – value in the first period)/value in the first period] × 100.
2018 saw the largest percentage increase in the price level as measured by the GDP deflator.
Year Nominal GDP Real GDP GDP Deflator % Increase 2017 13,300 12,900 103 - 2018 14,000 13,200 106 2. 2019 14,300 13,160 108 2. 2020 13,900 12,700 109 0. 2021 14,600 13,100 111 1.
Percentage Increase in the price level: 2018: ( 106 – 103) / 103 x 100 = 2% 2019 : ( 108 – 106) / 106 x 100 = 2% 2020 : ( 109 – 108) / 108 x 100 = 0% 2021 : ( 111 – 109) / 109 x 100 = 1%
13. Calculate GDP based on the following table. Which component of GDP (C, I, G, NX) does each item belong to?
Chapter 4 Tutorial Problem Set Answers
Course: Macroeconomics (ECF1200)
University: Monash University
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