Macroeconomics 8/E solutions manual and test bank Croushore, Bernanke & Abel

Macroeconomics 8/E solutions manual and test bank Croushore, Bernanke & Abel

Chapter 2
The Measurement and Structure of the National Economy

n Learning Objectives

I. Section Goals

A. Differentiate among the three approaches to national income accounting (Sec. 2.1)

B. Explain how GDP is measured (Sec. 2.2)

C. Discuss the measurement of aggregate saving and its relation to wealth (Sec. 2.3)

D. Explain the calculations of real GDP, price indexes, and inflation (Sec. 2.4)

E. Define real and nominal interest rates (Sec. 2.5)

II. Notes to Seventh Edition Users

A. In Sec. 2.3, we added a time-series graph showing national saving, private saving, and government saving as a percent of GDP. The graph shows that the ratio of private saving to GDP is relatively stable from 1960 to 2012, so the trend decline in the ratio of national saving to GDP is because of a trend decline in government saving relative to GDP.

n Teaching Notes

I. National Income Accounting: The Measurement of Production, Income, and Expenditure
(Sec. 2.1)

A. National income accounts: an accounting framework used in measuring current economic activity

B. Three alternative approaches give the same measurements

1. Product approach: the amount of output produced

2. Income approach: the incomes generated by production

3. Expenditure approach: the amount of spending by purchasers

C. Juice business example shows that all three approaches are equal

1. Important concept in product approach: value added = value of output minus value of inputs purchased from other producers

D. Why are the three approaches equivalent?

1. They must be, by definition

2. Any output produced (product approach) is purchased by someone (expenditure approach) and results in income to someone (income approach)

3. The fundamental identity of national income accounting:

total production = total income = total expenditure (2.1)

II. Gross Domestic Product (Sec. 2.2)

A. The product approach to measuring GDP

1. GDP (gross domestic product) is the market value of final goods and services newly produced within a nation during a fixed period of time

Data Application

The period referred to here is either a quarter or a year. You may want to show students what some of the tables from the National Income and Product Accounts look like, or send them to the library (or the Internet at www.bea.gov) to find the accounts in the Survey of Current Business.

Students are also interested in seeing what happens in the financial markets and to public opinion on the day a new GDP report comes out.

2. Market value: allows adding together unlike items by valuing them at their market prices

a. Problem: misses nonmarket items such as homemaking, the value of environmental quality, and natural resource depletion

Analytical Problems 1 and 3 both discuss difficulties in counting nonmarket items for GDP, including the important idea that GDP is not the same as welfare.

b. There is some adjustment to reflect the underground economy

c. Government services (that aren’t sold in markets) are valued at their cost of production

3. Newly produced: counts only things produced in the given period; excludes things produced earlier

4. Final goods and services

a. Don’t count intermediate goods and services (those used up in the production of other goods and services in the same period that they themselves were produced)

b. Final goods & services are those that are not intermediate

c. Capital goods (goods used to produce other goods) are final goods since they aren’t used up in the same period that they are produced

d. Inventory investment (the amount that inventories of unsold finished goods, goods
in process, and raw materials have changed during the period) is also treated as a final good

e. Adding up value added works well, since it automatically excludes intermediate goods

5. GNP vs. GDP

a. GNP (gross national product) = output produced by domestically owned factors
of production

GDP = output produced within a nation

b. GDP = GNP - NFP (net factor payments from abroad) (2.2)

c. NFP = payments to domestically owned factors located abroad minus payments
to foreign factors located domestically

Data Application

Prior to December 1991, the United States used GNP as its main measure of production; after that time GDP became the main concept. The main reasons for the switch were that GDP is more relevant to production in an open economy (though GNP is more relevant for income), and GDP is more precise than GNP in the advance estimate, since net factor payments are difficult to measure quickly. See Survey of Current Business, November 1991, for a discussion of the switch.

d. Example: Engineering revenues for a road built by a U.S. company in Saudi Arabia is part of U.S. GNP (built by a U.S. factor of production), not U.S. GDP, and is part of Saudi GDP (built in Saudi Arabia), not Saudi GNP

e. Difference between GNP and GDP is small for the United States, about 0.2%, but higher for countries that have many citizens working abroad

Data Application

The timeline for national income and product account releases is generally:

Advance estimate Last week of month following end of quarter

Second estimate Last week of second following month

Third estimate Last week of third following month

Revisions occur every July for the following three years. Each new release contains either additional new data that was not available before, or a change in seasonal factors, or a correction of errors made previously. Periodically, the annual revision in July contains significant changes in the method used to produce the data; these revisions can dramatically change the data going far back in time. [Note: this structure is different now than used to be the case: prior to 2009, the first three releases were known as advance, preliminary, and final, and major changes in the methods used to create the data were saved up for a benchmark revision, which took place about every 5 years, instead of being incorporated into the annual release.]

B. The expenditure approach to measuring GDP

1. Measures total spending on final goods and services produced within a nation during a specified period of time

2. Four main categories of spending: consumption (C), investment (I), government purchases of goods and services (G), and net exports (NX)

3. Y = C + I + G + NX, the income-expenditure identity (2.3)

4. Consumption: spending by domestic households on final goods and services
(including those produced abroad)

a. About 2/3 of U.S. GDP

b. Three categories

(1) Consumer durables (examples: cars, TV sets, furniture, and major appliances)

(2) Nondurable goods (examples: food, clothing, fuel)

(3) Services (examples: education, health care, financial services, and transportation)

Data Application

Note that the consumption category in the national income and product accounts does not correspond to economists’ concept of consumption, because it includes the full value of durable goods. When economists study consumption behavior, they must account for this; one way to do so is to assume that durable goods provide services that are proportional to their existing stock. Total consumption is this fraction of the stock of consumer durables, plus nondurables and services.

5. Investment: spending for new capital goods (fixed investment) plus inventory investment

a. About 1/6 of U.S. GDP

b. Business (or nonresidential) fixed investment: spending by businesses on structures and equipment and software

c. Residential fixed investment: spending on the construction of houses and apartment buildings

d. Inventory investment: increases in firms’ inventory holdings

Data Application

A major change in the national income and product accounts came in October 1999, when computer software purchased by businesses and government was classified as investment, rather than an input used up in production. As a result, real GDP and investment were revised up significantly, especially for the 1990s.

6. Government purchases of goods and services: spending by the government on goods or services

a. About 1/5 of U.S. GDP

b. Most by state and local governments, not federal government

c. Not all government expenditures are purchases of goods and services

(1) Some are payments that are not made in exchange for current goods and services

(2) One type is transfers, including Social Security payments, welfare, and unemployment benefits

(3) Another type is interest payments on the government debt

d. Some government spending is for capital goods that add to the nation’s capital stock, such as highways, airports, bridges, and water and sewer systems

Data Application

People often don’t realize how large transfer programs are relative to federal government consumption expenditures. For example, in 2011, transfer payments were $2,309 billion,
while government consumption expenditures were only $1,061 billion. Of that amount, most
($712 billion) was for national defense; nondefense consumption expenditures ($349 billion) were less than one-sixth of the amount of transfers. Other federal government expenditures included $498 billion in grants to state and local governments, $295 billion in net interest paid, and $61 billion in net subsidies to government enterprises. Gross investment by the federal government ($160 billion) was more than depreciation ($137 billion), so net investment was positive ($23 billion).

7. Net exports: exports minus imports

a. Exports: goods produced in the country that are purchased by foreigners

b. Imports: goods produced abroad that are purchased by residents in the country

c. Imports are subtracted from GDP, as they represent goods produced abroad, and were included in consumption, investment, and government purchases

Data Application

Behind the scenes at the Bureau of Economic Analysis (BEA), a major change took place in the 2000s concerning the national income accounts and the data on GDP. Because the types of goods and services people buy has changed so much in recent years, the BEA decided to modify how it categorizes industries when it collects data on production. The new system is known as NAICS: the North American Industry Classification System; it replaces a system called SIC: Standard Industrial Classification. NAICS differs from SIC in both principle and in practice.

The key principle governing NAICS is that firms that use similar production processes will be classified in the same industry, which was not true under SIC. The result is that the number of firms in different industries changed; for example, the manufacturing industry is different under NAICS than under SIC.

One of the main reasons for the switch from SIC to NAICS is the growth of service industries and computer-related industries. In the past 70 years, manufacturing output has declined from
54 percent of GDP to 38 percent, while the output of service industries has increased from
35 percent of GDP to 54 percent. The SIC has not been updated to reflect the changes in the economy. NAICS will also improve the compatibility of U.S. statistics with those in other countries.

The disadvantage of the switch from SIC to NAICS is that data from today based on NAICS will not be exactly comparable to data from the past based on SIC. But the BEA believes that the improved quality of the data will justify the loss of historical comparability. In addition, NAICS has the advantage of being very adaptable when industries change; for example, its information sector includes such categories as Internet publishing and broadcasting. Adding new categories will not be difficult as technology changes further and new industries evolve.

C. The income approach to measuring GDP

1. Adds up income generated by production (including profits and taxes paid to the government)

a. National income = compensation of employees (including benefits) + proprietors’
income + rental income of persons + corporate profits + net interest + taxes on production and imports + business current transfer payments + current surplus of government enterprises

Data Application

Note that the definition of income was changed in several ways in 2003. Several categories were broken down in more detail, indirect business taxes were included in the larger category of taxes on production and imports, and less netting was done for transfers, interest, and surplus or subsidies of government enterprises.

b. National income + statistical discrepancy = net national product

c. Net national product + depreciation (the value of capital that wears out in the period) = gross national product (GNP)

d. GNP - net factor payments (NFP) = GDP

2. Private sector and government sector income

a. Private disposable income = income of the private sector = private sector income
earned at home (Y or GDP) and abroad (NFP) + payments from the government sector
(transfers, TR, and interest on government debt, INT) - taxes paid to government

(T) = Y + NFP + TR + INT - T (2.4)

b. Government’s net income = taxes - transfers - interest payments = T - TR - INT (2.5)

c. Private disposable income + government’s net income = GDP + NFP = GNP

Numerical Problems 1, 2, 3, 4, and 5 provide practice in working with the national income and product accounts.

III. Saving and Wealth (Sec. 2.3)

A. Wealth

1. Household wealth = a household’s assets minus its liabilities

2. National wealth = sum of all households’, firms’, and governments’ wealth within the nation

3. Saving by individuals, businesses, and government determine wealth

B. Measures of aggregate saving

1. Saving = current income - current spending

2. Saving rate = saving/current income

3. Private saving = private disposable income - consumption

S_pvt = (Y + NFP - T + TR + INT) - C (2.6)

4. Government saving = net government income - government purchases of goods and services

S_govt = (T - TR - INT) - G (2.7)

a. Government saving = government budget surplus = government receipts - government outlays

 

Macroeconomics, 8e (Abel/Bernanke/Croushore)

Chapter 2 The Measurement and Structure of the National Economy

2.1 National Income Accounting

1) The accounting framework used in measuring current economic activity is called

A) the U.S. expenditure accounts.

B) the national income accounts.

C) the flow of funds accounts.

D) the balance of payments accounts.

Answer: B

Diff: 1

Topic: Section: 2.1

Question Status: Previous Edition

2) The three approaches to measuring economic activity are the

A) cost, income, and expenditure approaches.

B) product, income, and expenditure approaches.

C) consumer, business, and government approaches.

D) private, public, and international approaches.

Answer: B

Diff: 1

Topic: Section: 2.1

Question Status: Previous Edition

3) The value of a producer's output minus the value of the inputs it purchases from other producers is called the producer's

A) surplus.

B) profit.

C) value added.

D) gross product.

Answer: C

Diff: 1

Topic: Section: 2.1

Question Status: Previous Edition

4) The value added of a producer is the

A) total amount for which all its products sell minus its change in inventories.

B) value of its total sales once externalities are accounted for.

C) value of its output minus the value of the inputs it purchases from other producers.

D) quality-adjusted amount of its total sales less any commissions paid.

Answer: C

Diff: 1

Topic: Section: 2.1

Question Status: New

5) The Bigdrill company drills for oil, which it sells for $200 million to the Bigoil company to be made into gas. The Bigoil company's gas is sold for a total of $600 million. What is the total contribution to the country's GDP from companies Bigdrill and Bigoil?

A) $200 million

B) $400 million

C) $600 million

D) $800 million

Answer: C

Diff: 2

Topic: Section: 2.1

Question Status: Previous Edition

6) Sam's Semiconductors produces computer chips, which it sells for $10 million to Carl's Computer Company (CCC). CCC's computers are sold for a total of $16 million. What is the value added of CCC?

A) $6 million

B) $10 million

C) $16 million

D) $26 million

Answer: A

Diff: 1

Topic: Section: 2.1

Question Status: Previous Edition

7) The Compagnie Naturelle sells mounted butterflies, using butterfly bait it buys from another firm for $20,000. It pays its workers $35,000, pays $1,000 in taxes, and has profits of $3,000. What is its value added?

A) $3,000

B) $19,000

C) $39,000

D) $59,000

Answer: C

Diff: 2

Topic: Section: 2.1

Question Status: Previous Edition

8) The equation total production = total income = total expenditure is called

A) the goods-market equilibrium condition.

B) the total identity.

C) the fundamental identity of national income accounting.

D) Say's Law.

Answer: C

Diff: 1

Topic: Section: 2.1

Question Status: Previous Edition

9) The fundamental identity of national income accounting is

A) total production = total income - total expenditure.

B) total production = total income + total expenditure.

C) total production = total income = total expenditure.

D) total production = total income / total expenditure.

Answer: C

Diff: 1

Topic: Section: 2.1

Question Status: New

10) To ensure that the fundamental identity of national income accounting holds, changes in inventories are

A) treated as part of expenditure.

B) treated as part of saving.

C) ignored.

D) counted as consumption.

Answer: A

Diff: 1

Topic: Section: 2.1

Question Status: Previous Edition

11) Describe the three different approaches to measuring the amount of economic activity that occurs during a period of time and explain why they all give identical measurements.

Answer: The approaches are the product approach, which measures the amount of output produced; the income approach, which measures the incomes received by producers of output; and the expenditure approach, which measures the amount of spending by the ultimate purchasers of output. They give identical measurements because everything that is produced is purchased by someone, so the expenditure and product approaches must be equal, and because anything that is purchased means that someone is earning income in the same amount, so the expenditure and income approaches must be equal.

Diff: 2

Topic: Section: 2.1

Question Status: Previous Edition

2.2 Gross Domestic Product

1) To what extent are homemaking and child-rearing accounted for in the government's GDP accounts?

A) Not at all

B) Only to the extent that they are provided for pay

C) Only to the extent that taxes are paid on them

D) All homemaking and child-rearing are accounted for

Answer: B

Diff: 1

Topic: Section: 2.2

Question Status: Previous Edition

2) The measurement of GDP includes

A) nonmarket goods such as homemaking and child-rearing.

B) the benefits of clean air and water.

C) estimated values of activity in the underground economy.

D) purchases and sales of goods produced in previous periods.

Answer: C

Diff: 1

Topic: Section: 2.2

Question Status: Previous Edition

3) Which of the following is included in U.S. GDP?

A) The sale of a new car from a manufacturer's inventory

B) The purchase of a watch from a Swiss company

C) The sale of a used car

D) A newly constructed house

Answer: D

Diff: 1

Topic: Section: 2.2

Question Status: Previous Edition

4) Government statisticians adjust GDP figures to include estimates of

A) the value of homemaking (work done within the home).

B) the underground economy.

C) child-rearing services provided by stay-at-home parents.

D) the costs of pollution to society.

Answer: B

Diff: 2

Topic: Section: 2.2

Question Status: Previous Edition

5) Because government services are not sold in markets,

A) they are excluded from measurements of GDP.

B) the government tries to estimate their market value and uses this to measure the government's contribution to GDP.

C) they are valued at their cost of production.

D) taxes are used to value their contribution.

Answer: C

Diff: 1

Topic: Section: 2.2

Question Status: Previous Edition

6) Intermediate goods are

A) capital goods, which are used up in the production of other goods but were produced in earlier periods.

B) final goods that remain in inventories.

C) goods that are used up in the production of other goods in the same period that they were produced.

D) either capital goods or inventories.

Answer: C

Diff: 1

Topic: Section: 2.2

Question Status: Previous Edition

7) Capital goods are

A) a type of intermediate good.

B) final goods, because they are not used up during a given year.

C) produced in the same year as the related final good, whereas intermediate goods are produced in different years.

D) produced in one year, whereas final goods are produced over a period of more than one year.

Answer: B

Diff: 1

Topic: Section: 2.2

Question Status: Previous Edition

8) Capital goods are

A) not counted in GDP as final goods.

B) not used to produce other goods.

C) used up in the same period that they are produced.

D) goods used to produce other goods.

Answer: D

Diff: 1

Topic: Section: 2.2

Question Status: New

9) Marvin's Metal Company produces screws that it sells to Ford, which uses the screws as a component of its cars. In the national income accounts, the screws are classified as

A) inventory.

B) final goods.

C) capital goods.

D) intermediate goods.

Answer: D

Diff: 2

Topic: Section: 2.2

Question Status: Previous Edition

10) Larry's Lathe-makers Limited produces lathes, which are purchased by furniture manufacturers all over the world. The standard lathe depreciates over a twenty-five year period. In the national income accounts, the lathes are classified as

A) inventory.

B) raw materials.

C) capital goods.

D) intermediate goods.

Answer: C

Diff: 2

Topic: Section: 2.2

Question Status: Previous Edition

11) Fred the farmer purchased five new tractors at $20,000 each. Fred sold his old tractors to other farmers for $50,000. The net increase in GDP of these transactions was

A) $50,000.

B) $100,000.

C) $125,000.

D) $150,000.

Answer: B

Diff: 2

Topic: Section: 2.2

Question Status: Previous Edition

12) Inventories include each of the following except

A) unsold finished goods.

B) goods in process.

C) raw materials held by firms.

D) office equipment.

Answer: D

Diff: 1

Topic: Section: 2.2

Question Status: Previous Edition

13) GDP differs from GNP because

A) GDP = GNP - net factor payments from abroad.

B) GNP = GDP - net factor payments from abroad.

C) GDP = GNP - capital consumption allowances.

D) GNP = GDP - capital consumption allowances.

Answer: A

Diff: 1

Topic: Section: 2.2

Question Status: Previous Edition

14) If an American construction company built a road in Kuwait, this activity would be

A) excluded from U.S. GNP.

B) fully included in U.S. GDP.

C) included in U.S. GNP only for that portion that was attributable to American capital and labor.

D) included in U.S. GDP but not in U.S. GNP.

Answer: C

Diff: 2

Topic: Section: 2.2

Question Status: Previous Edition

15) Nations such as Egypt and Turkey may have wide differences between GNP and GDP because both the countries

A) have a high level of imports and exports relative to GNP.

B) have a large portion of their GNP produced by multinational corporations.

C) have a large number of citizens working abroad.

D) purchase large amounts of military wares from other countries.

Answer: C

Diff: 2

Topic: Section: 2.2

Question Status: Previous Edition

16) If C = $500, I = $150, G = $100, NX = $40, and GNP = $800, how much is NFP?

A) -$10

B) -$5

C) $5

D) $10

Answer: D

Diff: 3

Topic: Section: 2.2

Question Status: Previous Edition

17) If C = $250, I = $50, G = $60, NX =- $20, and NFP = $5, how much is GNP?

A) $365

B) $335

C) $340

D) $345

Answer: D

Diff: 3

Topic: Section: 2.2

Question Status: New

18) If C = $400, I = $100, G = $50, NX = $30, and NFP = $5, how much is GDP?

A) $580

B) $575

C) $585

D) $550

Answer: A

Diff: 3

Topic: Section: 2.2

Question Status: New

19) The income-expenditure identity says that

A) Y = C + S + T.

B) Y = C + I + G.

C) Y = C + I + G + NX.

D) Y = C + I + G + NX + CA.

Answer: C

Diff: 1

Topic: Section: 2.2

Question Status: Previous Edition

20) Which of the following is not a category of consumption spending in the national income accounts?

A) Consumer durables

B) Nondurable goods

C) Services

D) Housing purchases

Answer: D

Diff: 1

Topic: Section: 2.2

Question Status: Previous Edition

21) Consumer spending is spending by ________ households on final goods and services produced ________.

A) domestic; domestically and abroad

B) domestic; domestically

C) domestic and foreign; domestically and abroad

D) domestic and foreign; domestically

Answer: A

Diff: 2

Topic: Section: 2.2

Question Status: Previous Edition