Chapter 26-1
The purchase of wheat flour used to make bread is the purchase of an intermediate good. Thus, it is not counted in GDP: Only final goods are counted in GDP.
Pokemon cards were counted in GDP when they were first produced. Selling used Pokemon cards on eBay does not contribute to GDP.
Because the worker from Colombia earns his money in New York, this is considered part of the GDP of the United States, not Colombia. GDP counts what is produced within a country, whether by its citizens or others.
Chapter 26-2
The growth rate is found by subtracting $5,803 billion from $5,995 billion, and then dividing that number by $5,803 billion:
($5,995 - $5,803)·$5,803 = $192·$5,803 = 0.033, or 3.3%
Chapter 26-3
China has a high GDP but a low GDP per capita.
B-5
Of the top 10 countries ranked by GDP in Table 6.1, the United Kingdom, France, and Italy have GDP under $2.5 trillion but have considerable GDP per capita.
We convert nominal variables into real variables to account for price changes so that we can make comparisons over time.
Chapter 26-4
Business fluctuations are the short-run movements in real GDP around its long-term trend.
It is sometimes difficult to determine if an economy is in a recession because of simple data problems: It takes time to collect data, then the conclusions drawn from the data may be revised once additional data become available after additional time has passed.
Chapter 26-5
Consumption (C) is the largest component of national expenditure, averaging 62.9%.
Consumption expenditures are more stable than investment expenditures. It’s usually easier to delay investment than consumption so consumption normally varies only slightly, but investment expenditure can vary dramatically, especially in an economic downturn, as businesses hold off on investment. For these reasons, the part of consumption that is most volatile is consumption of durable goods such as cars and major appliances, because the purchase of these goods can usually be easily delayed.
The income approach is the flip side of the spending approach: Every dollar that someone earns in income is a dollar of income that someone else has spent.
Chapter 26-6
GDP measures things for which market values can be obtained. It does not measure things such as illegal activities or clean air because it is difficult to determine their market values.
Two countries that have the same level of GDP per capita do not necessarily have the same level of inequality. Let’s take Country A and Country B, each of which has only two citizens. Country A’s citizens earn $999 and $1, respectively, with GDP per capita of $500. Country B’s citizens earn $500 and $500, respectively, with GDP per capita of $500 also. Note that the two countries have the same GDP per capita but they have different levels of inequality.
Because they do not account for everything, GDP statistics are not perfect. Nevertheless, they are useful in giving a good sense of how the value of what a nation produces changes over time.
Chapter 27-1
According to Figure 27.2, approximately 30% of the world’s population lived in China in 2011.
B-6
Using the rule of 70, if you make 5% on your savings, it will take 70/5 or 14 years for your savings to double. At 8%, it will take 70/8 or a little under 9 years to double.
According to Figure 27.4, Japan’s real GDP per capita crossed the $10,000 barrier around 1970 and the $20,000 barrier around 1990. Using the rule of 70, we know that it took 20 years to double, or 70/x = 20. Therefore, the growth rate was approximately 3.5% per year over this time span.
Chapter 27-2
The United States has much more physical capital—tools, machines, equipment—than China, but China has more than Nigeria.
Physical capital, human capital, and technological knowledge are the three primary factors of production.
Chapter 27-3
Five institutions that promote economic growth are property rights, honest government, political stability, a dependable legal system, and competitive and open markets.
The Wars of the Roses were a time of civil war. Economic growth tends to decline during such times. Throughout Henry VII’s unchallenged reign, economic growth picked up dramatically.
Under a system of collective farming where corn production was shared, increased individual effort would bring very little reward to the individual. Because individual incentives were poor, you would expect limited corn production, maybe even starvation.
Chapter 28-1
In Figure 28.6, when the capital stock is 400, depreciation is higher than investment.
When capital is 400, investment is 6 units.
When capital is 400, depreciation is 8 units.
When depreciation is greater than investment, the capital stock shrinks.
Chapter 28-2
As more capital is added, the marginal product of capital declines.
Capital depreciates because machines wear out over time and have to be replaced, roads wear out and need to be repaired or replaced, bridges wear out. As the capital stock increases, the total amount of capital depreciation increases.
Chapter 28-3
At the steady-state level of capital, investment and depreciation are equal.
B-7
In Figure 28.7, output is 15 units available to be consumed in the old steady state, and 20 units in the new steady state.
The farther they are below their steady-state level, the more quickly countries can grow.
Countries with higher investment rates have higher GDP per capita.
Chapter 28-4
High tax rates on imports would reduce trade and thus lower the incentive to produce new ideas.
Spillovers occur when ideas benefit other consumers and firms, besides the creator of the idea. If the creator of an idea cannot get the full benefit of the idea, this will reduce the incentive to generate new ideas.
The economic reason to support a prize for malaria research rather than cancer research is that the incentive to produce cancer drugs is already high because of a large and wealthy market. Malaria tends to be located in poorer countries where people have a lower ability to pay for drugs and thus the incentive to develop new drugs is lower.