For any problem marked with
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1. Go to the website of the Bureau of Economic Analysis and find the growth rate of real GDP for the most recent quarter. Go to the website of the Bureau of Labor Statistics and find the inflation rate over the past year and the unemployment rate for the most recent month. How do you interpret these data?
2. A farmer grows a bushel of wheat and sells it to a miller for $1. The miller turns the wheat into flour and then sells the flour to a baker for $3. The baker uses the flour to make bread and sells the bread to an engineer for $6. The engineer eats the bread. What is the value added by each person? What is the bread’s contribution to GDP?
3. Suppose a woman marries her butler. After they are married, her husband continues to wait on her as before, and she continues to support him as before (but as a husband rather than as an employee). How does the marriage affect GDP? How do you think it should affect GDP?
4. Place each of the following transactions in one of the four components of expenditure: consumption, investment, government purchases, and net exports.
Boeing sells an airplane to the U.S. Air Force.
Boeing sells an airplane to American Airlines.
Boeing sells an airplane to Air France.
Boeing sells an airplane to Amelia Earhart.
Boeing builds an airplane to be sold next year.
5. Find data on GDP and its components, and compute the percentage of GDP for the following components for 1950, 1980, and the most recent year available.
Personal consumption expenditures
Gross private domestic investment
Government purchases
Net exports
National defense purchases
Imports
Do you see any stable relationships in the data? Do you see any trends? (Hint: You can find the data at http:/
6. • Tina is the sole owner of Tina’s Lawn Mowing, Incorporated (TLM). In one year, TLM collects $1,000,000 from customers to mow their lawns. TLM’s equipment depreciates in value by $125,000. TLM pays $600,000 to its workers, who pay $140,000 in taxes on this income. TLM pays $50,000 in corporate income taxes and pays Tina a dividend of $150,000. Tina pays taxes of $60,000 on this dividend income. TLM retains $75,000 of earnings in the business to finance future expansion. How much does this economic activity contribute to each of the following?
GDP
NNP
National income
Compensation of employees
Proprietors’ income
Corporate profits
Personal income
Disposable personal income
7. • Consider an economy that produces and consumes hot dogs and hamburgers. In the following table are data for two different years.
Good 
2010 
2015 


Quantity 
Price 
Quantity 
Price 

Hot dogs 
200 
$2 
250 
$4 
Hamburgers 
200 
$3 
500 
$4 
Using 2010 as the base year, compute the following statistics for each year: nominal GDP, real GDP, the implicit price deflator for GDP, and a fixed
By what percentage did prices rise between 2010 and 2015? Give the answer for each good and also for the two measures of the overall price level. Compare the answers given by the Laspeyres and Paasche price indexes. Explain the difference.
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8. Abby consumes only apples. In year 1, red apples cost $1 each, green apples cost $2 each, and Abby buys 10 red apples. In year 2, red apples cost $2, green apples cost $1, and Abby buys 10 green apples.
Compute a consumer price index for apples for each year. Assume that year 1 is the base year in which the consumer basket is fixed. How does your index change from year 1 to year 2?
Compute Abby’s nominal spending on apples in each year. How does it change from year 1 to year 2?
Using year 1 as the base year, compute Abby’s real spending on apples in each year. How does it change from year 1 to year 2?
Defining the implicit price deflator as nominal spending divided by real spending, compute the deflator for each year. How does the deflator change from year 1 to year 2?
Suppose that Abby is equally happy eating red or green apples. How much has the true cost of living increased for Abby? Compare this answer to your answers to parts (a) and (d). What does this example tell you about the Laspeyres and Paasche price indexes?
9.
• An economy has 100 people divided among the following groups: 25 have full
Calculate the labor force and the labor
Calculate the number of unemployed and the unemployment rate.
Calculate total employment in two ways: as measured by the household survey and as measured by the establishment survey.
10. In a speech that Senator Robert Kennedy gave when he was running for president in 1968, he said the following about GDP:
[It] does not allow for the health of our children, the quality of their education, or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials. It measures neither our courage, nor our wisdom, nor our devotion to our country. It measures everything, in short, except that which makes life worthwhile, and it can tell us everything about America except why we are proud that we are Americans.
Was Robert Kennedy right? If so, why do we care about GDP?
11. Consider whether each of the following events is likely to increase or decrease real GDP. In each case, do you think the well
A hurricane in Florida forces Disney World to shut down for a month.
The discovery of a new, easy
Increased hostility between unions and management sparks a rash of strikes.
Firms throughout the economy experience falling demand, causing them to lay off workers.
Congress passes new environmental laws that prohibit firms from using production methods that emit large quantities of pollution.
More high school students drop out of school to take jobs mowing lawns.
Fathers around the country reduce their workweeks to spend more time with their children.
1 Mathematical note: The proof that this trick works begins with the product rule from calculus:
d(PY) = Y dP + P dY.
Now divide both sides of this equation by PY to obtain:
d(PY)/(PY) = dP/P + dY/Y.
Notice that all three terms in this equation are percentage changes.
2 Robert B. Barsky and Jeffrey A. Miron, “The Seasonal Cycle and the Business Cycle,” Journal of Political Economy 97 (June 1989): 503–
3 To learn more about the construction of GDP, see J. Steven Landefeld, Eugene P. Seskin, and Barbara M. Fraumeni, “Taking the Pulse of the Economy: Measuring GDP,” Journal of Economic Perspectives 22 no.2 (2008): 193–
4 Because a Laspeyres index overstates inflation and a Paasche index understates it, one might strike a compromise by taking an average of the two measured rates of inflation. This is the approach taken by another type of index, called a Fisher index.
5 For further discussion of these issues, see Matthew Shapiro and David Wilcox, “Mismeasurement in the Consumer Price Index: An Evaluation,” NBER Macroeconomics Annual, 1996, and the symposium on “Measuring the CPI” in the Winter 1998 issue of the Journal of Economic Perspectives.
6 George Perry, “Gauging Employment: Is the Professional Wisdom Wrong?” Brookings Papers on Economic Activity (2005): 2.
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