Questions and Problems

Check Your Understanding

1. Question

   How are business cycles defined? Describe the four phases of business cycles.

   Prob 16 1. How are business cycles defined? Describe the four phases of business cycles.

2. Question

   What is a key problem with the way the NBER dates recessions and recoveries?

   Prob 16 2. What is a key problem with the way the NBER dates recessions and recoveries?

3. Question

   Describe the circular flow diagram. Why must all income equal spending in the economy?

   Prob 16 3. Describe the circular flow diagram. Why must all income equal spending in the economy?

4. Question

   Why does GDP accounting include only the final value of goods and services produced? What would be the problem if intermediate products were included?

   Prob 16 4. Why does GDP accounting include only the final value of goods and services produced? What would be the problem if intermediate products were included?

5. Question

   Describe why GDP can be computed using either expenditures or income.

   Prob 16 5. Describe why GDP can be computed using either expenditures or income.

6. Question

   What does GDP per capita measure? Why is it not a precise measure of a typical person’s standard of living in a country?

   Prob 16 6. What does GDP per capita measure? Why is it not a precise measure of a typical person’s standard of living in a country?

Apply the Concepts

7. Question

   Explain how it is possible for an economy in the recovery phase of the business cycle to have a lower GDP and a higher unemployment rate than when it was in the recession phase of the business cycle.

   Prob 16 7. Explain how it is possible for an economy in the recovery phase of the business cycle to have a lower GDP and a higher unemployment rate than when it was in the recession phase of the business cycle.

8. Question

   Assume the federal government runs huge budget deficits today to finance, say, Social Security, Medicare, and other programs for the elderly, and finances these deficits by selling bonds, which raises interest rates. Because businesses often borrow money to invest, and interest is the cost of borrowing, these higher interest rates will reduce investment. Describe why this scenario is likely to be bad for the macroeconomy.

   Prob 16 8. Assume the federal government runs huge budget deficits today to finance, say, Social Security, Medicare, and other programs for the elderly, and finances these deficits by selling bonds, which raises interest rates. Because businesses often borrow money to invest, and interest is the cost of borrowing, these higher interest rates will reduce investment. Describe why this scenario is likely to be bad for the macroeconomy.

9. Question

   Critics argue that the NIPA are outdated and fail to account for “intangibles” in our new knowledge economy. For example, many firms create copyrighted materials (movies, books, etc.) that when completed are much more valuable than just the value of the marketplace inputs that went into their production. What might be some of the problems associated with trying to include these intangibles in the NIPA?

   Prob 16 9. Critics argue that the NIPA are outdated and fail to account for “intangibles” in our new knowledge economy. For example, many firms create copyrighted materials (movies, books, etc.) that when completed are much more valuable than just the value of the marketplace inputs that went into their production. What might be some of the problems associated with trying to include these intangibles in the NIPA?

10. Question

    Gross domestic product and its related statistics are published quarterly and are often revised in the following quarter. Do you think quarterly publication and revision in the next quarter would present problems for policymakers trying to control the business cycle? Why or why not?

    Prob 16 10. Gross domestic product and its related statistics are published quarterly and are often revised in the following quarter. Do you think quarterly publication and revision in the next quarter would present problems for policymakers trying to control the business cycle? Why or why not?

11. Question

    Gross private domestic investment (GPDI) includes new residential construction as investment. Why is new housing included? Isn’t this just another consumer purchase of housing services? How would the sale of an existing house be treated in the GDP accounts?

    Prob 16 11. Gross private domestic investment (GPDI) includes new residential construction as investment. Why is new housing included? Isn’t this just another consumer purchase of housing services? How would the sale of an existing house be treated in the GDP accounts?

12. Question

    Assume that we are able to account for environmental degradation in the NIPA accurately. Rank the following countries by the percent reduction to their GDP (from least to most percentage reduction): the United States, China, and Norway.

    Prob 16 12. Assume that we are able to account for environmental degradation in the NIPA accurately. Rank the following countries by the percent reduction to their GDP (from least to most percentage reduction): the United States, China, and Norway.

In the News

13. Question

    A headline in the January 27, 2012, USA Today read “Economists See Growth Slowing, Recession Risk Falling,” highlighting government statistics that showed economic growth slowing to a 2.2% rate for the year, below previous estimates. If economic growth is slowing, wouldn’t this suggest that another recession is likely to occur soon? Explain why the headline would suggest the opposite.

    Prob 16 13. A headline in the January 27, 2012, USA Today read “Economists See Growth Slowing, Recession Risk Falling,” highlighting government statistics that showed economic growth slowing to a 2.2% rate for the year, below previous estimates. If economic growth is slowing, wouldn’t this suggest that another recession is likely to occur soon? Explain why the headline would suggest the opposite.

14. Question

    According to the Happy Planet Index, an annual survey conducted by the New Economics Foundation, Costa Rica ranks as the happiest country on Earth (“Take a Trip to the Happiest Country on Earth,” Forbes, October 1, 2012). The index takes into account a number of factors including the quality of life and life expectancy, but most important the index values the sustainability of the environment, which it argues “establishes an undeniable link between happiness and the environment or nature.” The World Bank estimates that Costa Rica’s GDP per capita in 2012 was approximately $8,800, about one-fifth that of the United States. Explain why GDP per capita does not always correlate well with a country’s standard of living.

    Prob 16 14. According to the Happy Planet Index, an annual survey conducted by the New Economics Foundation, Costa Rica ranks as the happiest country on Earth (“Take a Trip to the Happiest Country on Earth,” Forbes, October 1, 2012). The index takes into account a number of factors including the quality of life and life expectancy, but most important the index values the sustainability of the environment, which it argues “establishes an undeniable link between happiness and the environment or nature.” The World Bank estimates that Costa Rica’s GDP per capita in 2012 was approximately $8,800, about one-fifth that of the United States. Explain why GDP per capita does not always correlate well with a country’s standard of living.

Solving Problems

15. The table below lists gross domestic product (GDP), consumption (C), gross private domestic investment (I), government spending (G), and net exports (X – M). Compute each as a percent of GDP for the five years presented.
    

    1. Question

       Which component of GDP is the most stable? Look for the smallest change from the year with the smallest contribution to GDP to the year with the largest contribution.

       Prob 3 15a. Which component of GDP is the most stable? Look for the smallest change from the year with the smallest contribution to GDP to the year with the largest contribution.

    2. Question

       Which is the most volatile as a percent of GDP?

       Prob 3 15b. Which is the most volatile as a percent of GDP?

    3. Question

       Ignoring net exports, which component has grown the fastest as a percent of GDP since 1965?

       Prob 3 15c. Ignoring net exports, which component has grown the fastest as a percent of GDP since 1965?

16. Question

    Using the data below (given in millions of $U.S.), compute GDP, national income, and net domestic product.
    

    
    
    
    

    Prob 16 16. Using the data below (given in millions of $U.S.), compute GDP, national income, and net domestic product.

17. Question

    According to By the Numbers, in what year since 2005 was the difference between the unemployment rate and the real GDP growth rate the largest? What phase of the business cycle would this year best represent?

    Prob 16 17. According to By the Numbers, in what year since 2005 was the difference between the unemployment rate and the real GDP growth rate the largest? What phase of the business cycle would this year best represent?

18. Question

    According to By the Numbers, has the personal savings rate trended upward or downward during the last five economic recessions? Why does this trend occur?

    Prob 16 18. According to By the Numbers, has the personal savings rate trended upward or downward during the last five economic recessions? Why does this trend occur?