var imagesSmall = ",,,"; var imagesLarge = ",kwmodsecon3eupdates-numbered_fig-ch7_fig_2,kwmodsecon3eupdates-numbered_fig-ch7_fig_4,kwmodsecon3eupdates-numbered_fig-ch7_fig_6,kwmodsecon3eupdates-numbered_fig-ch7_fig_7,,"; var imagesXlarge = "kwmodsecon3eupdates-unnumbered_fig-ch7_un_01,kwmodsecon3eupdates-numbered_fig-ch7_fig_1,kwmodsecon3eupdates-numbered_fig-ch7_fig_3,,,,"; /*** CYU answers ***/ xBookUtils.showAnswers['kwmodsecon3eupdates-cyu-7-1-1a'] = "
Let’s start by considering the relationship between the total value added of all domestically produced final goods and services and aggregate spending on domestically produced final goods and services. These two quantities are equal because every final good and service produced in the economy is either purchased by someone or added to inventories. And additions to inventories are counted as spending by firms. Next, consider the relationship between aggregate spending on domestically produced final goods and services and total factor income. These two quantities are equal because all spending that is channeled to firms to pay for purchases of domestically produced final goods and services is revenue for firms. Those revenues must be paid out by firms to their factors of production in the form of wages, profit, interest, and rent. Taken together, this means that all three methods of calculating GDP are equivalent.
"; xBookUtils.showAnswers['kwmodsecon3eupdates-cyu-7-1-2a'] = "Firms make sales to other firms, households, the government, and the rest of the world. Households are linked to firms through the sale of factors of production to firms, through purchases from firms of final goods and services, and through lending funds to firms in the financial markets. Households are linked to the government through their payment of taxes, their receipt of transfers, and their lending of funds to the government via the financial markets. Finally, households are linked to the rest of the world through their purchases of imports and transactions with foreigners in financial markets.
"; xBookUtils.showAnswers['kwmodsecon3eupdates-cyu-7-1-3a'] = "You would be counting the value of the steel twice—once as it was sold by American Steel to American Motors and once as part of the car sold by American Motors.
"; xBookUtils.showAnswers['kwmodsecon3eupdates-cyu-7-2-1a'] = "In 2013 nominal GDP was (1,000,000 × $0.40) + (800,000 × $0.60) = $400,000 + $480,000 = $880,000. A 25% rise in the price of french fries from 2013 to 2014 means that the 2014 price of french fries was 1.25 × $0.40 = $0.50. A 10% fall in servings means that 1,000,000 × 0.9 = 900,000 servings were sold in 2014. As a result, the total value of sales of french fries in 2014 was 900,000 × $0.50 = $450,000. A 15% fall in the price of onion rings from 2013 to 2014 means that the 2014 price of onion rings was 0.85 × $0.60 = $0.51. A 5% rise in servings sold means that 800,000 × 1.05 = 840,000 servings were sold in 2014. As a result, the total value of sales of onion rings in 2014 was 840,000 × $0.51 = $428,400. Nominal GDP in 2014 was $450,000 + $428,400 = $878,400. To find real GDP in 2014, we must calculate the value of sales in 2014 using 2013 prices: (900,000 french fries × $0.40) + (840,000 onion rings × $0.60) = $360,000 + $504,000 = $864,000.
"; xBookUtils.showAnswers['kwmodsecon3eupdates-cyu-7-2-1b'] = "The change in nominal GDP from 2013 to 2014 was (($878,400 − $880,000)/$880,000) × 100 = −0.18%, a decline. But a comparison using real GDP shows a decline of (($864,000 − $880,000)/$880,000) × 100 = −1.8%. That is, a calculation based on real GDP shows a drop 10 times larger (1.8%) than a calculation based on nominal GDP (0.18%). In this case, the calculation based on nominal GDP underestimates the true magnitude of the change.
"; xBookUtils.showAnswers['kwmodsecon3eupdates-cyu-7-2-2a'] = "A price index based on 2005 prices will contain a relatively high price of electronics and a relatively low price of housing compared to a price index based on 2010 prices. This means that a 2005 price index used to calculate real GDP in 2013 will magnify the value of electronics production in the economy, but a 2010 price index will magnify the value of housing production in the economy.
"; xBookUtils.showAnswers['kwmodsecon3eupdates-cyu-7-3-1a'] = "This market basket costs, pre-frost, (100 × $0.20) + (50 × $0.60) + (200 × $0.25) = $20 + $30 + $50 = $100. The same market basket, post-frost, costs (100 × $0.40) + (50 × $1.00) + (200 × $0.45) = $40 + $50 + $90 = $180. So the price index is ($100/$100) × 100 = 100 before the frost and ($180/$100) × 100 = 180 after the frost, implying a rise in the price index of 80%. This increase in the price index is less than the 84.2% increase calculated in the text. The reason for this difference is that the new market basket of 100 oranges, 50 grapefruit, and 200 lemons contains proportionately more of the items that have experienced relatively lower price increases (the lemons, whose price has increased by 80%) and proportionately fewer of the items that have experienced relatively large price increases (the oranges, whose price has increased by 100%). This shows that the price index can be very sensitive to the composition of the market basket. If the market basket contains a large proportion of goods whose prices have risen faster than the prices of other goods, it will lead to a higher estimate of the increase in the price level. If it contains a large proportion of goods whose prices have risen more slowly than the prices of other goods, it will lead to a lower estimate of the increase in the price level.
"; xBookUtils.showAnswers['kwmodsecon3eupdates-cyu-7-3-2a'] = "A market basket determined 10 years ago will contain fewer cars than at present. Given that the average price of a car has grown faster than the average prices of other goods, this basket will underestimate the true increase in the cost of living because it contains relatively too few cars.
"; xBookUtils.showAnswers['kwmodsecon3eupdates-cyu-7-3-2b'] = "A market basket determined 10 years ago will not contain broadband internet access. So it cannot track the fall in prices of internet access over the past few years. As a result, it will overestimate the true increase in the cost of living.
"; xBookUtils.showAnswers['kwmodsecon3eupdates-cyu-7-3-3a'] = "Using Equation 7-3, the inflation rate from 2012 to 2013 is ((229.324 − 226.229)/226.229) × 100 = 1.4%.
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