Deck 2: Thinking Like an Economist

Question 1

Explain why the value of GDP in 2009 would or would not change as a result of each transaction described below:
a. In 2009, the Smith family purchases a new house that was built in 2009. b. In 2009, the Jones family purchases a house that was built in 2001.
c. In 2009, a construction company purchases windows to put in the Smith family home that was built in 2009.
d. In 2009, Mr. Jones paints all of the rooms of the Jones family house purchased in 2009.
e. In 2009, Mr. Smith uses an online brokerage service to purchase shares of stock in a construction company.

Answer 1

a. GDP in 2009 increases by the purchase price of the house, which is a newly produced good.
b. GDP in 2009 does not change because the house is not a newly produced good,
since it was built in 2001. Transactions involving used goods are not included in GDP. c. GDP in 2009 does not change directly because the windows are intermediate goods, not final goods. The value of intermediate goods is not included in GDP to avoid double counting. The value of the windows is implicitly included in the price of the house.
d. GDP in 2009 does not change because home production is not included in GDP.
e. GDP in 2009 does not change because financial transactions do not represent the production of final goods and services and are not included in GDP.

Question 2

Economic statistics are not perfect. Explain at least one way in which each of the following statistics as currently calculated in the United States fails to completely or accurately measure the corresponding economic concept (in parentheses):
a. real GDP per person (economic well-being);
b. CPI (cost of living);
c. unemployment rate (involuntary unemployment).

Answer 2

a. The official measure of GDP does not include measurements of leisure time available, nonmarket production, production in the underground economy, the distribution of income, or production externalities (e.g., pollution).
b. The CPI does not allow substitution away from products with rising prices and has difficulty distinguishing between price changes and quality changes in products included in the index.
c. The official unemployment rate does not take into account discouraged workers,
part- time workers who desire full-time employment, and workers employed in jobs not matching their skill level, such as taxi drivers with PhDs in physics.

Question 3

There are a number of statistics computed to measure the price level, such as the GDP deflator and the CPI. The choice of which of these measures to use depends in many cases on the specific question in which you are interested. For each of the following situations, state whether the CPI or GDP deflator is a more appropriate measure to use and explain why the statistic is preferred.
a. You are interested in looking at the impact of higher prices of imported oil in the overall cost of living.
b. The government is interested in whether increases in defense spending are affecting the price level.
c. An economic consulting firm is investigating the impact on the aggregate price level of more computers and electronic technology used in production.

Answer 3

a. The CPI is the more appropriate statistic, because the price of imports is not included in the GDP deflator.
b. The GDP deflator is the more appropriate statistic, because the CPI does not include the prices of goods and services purchased by the government sector.
c. The GDP deflator is more appropriate, because the CPI does not include prices of goods and services purchased by businesses or the government sector.

Question 4

In the exhibit, the citizens of country XYZ come to desire more of good A. As a result, the quantity and price of the good both rise.

a. Compute nominal GDP in the base year and later year.
b. Compute real GDP in the base and later years (in base-year prices).
c. Compute the GDP deflator in the later year, using your answers to parts a and b.-
d. Compute a fixed-weight price index for the later year, using the base-year quantities as weights.
e. Which price index rises faster, the GDP deflator (Paasche) index or the fixed- weight index (Laspeyres) index?

Question 5

GDP is the market value of all goods and services produced within an economy in a given period of time.

A)used
B)intermedia
C)te consumer
D)final

Question 6

The economic statistic used to measure the level of prices is:

A)GDP.
B)CPI.
C)GNP.
D)real GDP.

Question 7

There are a number of measures of aggregate economic activity, such as GDP, GNP, national income, personal income, and disposable personal income. Each of these measures can be a good indicator depending on the issue under consideration. For each of the following issues,
give your reasons for selecting one of the measures just mentioned as the best indicator to use in studying the issue:
a. the proportion of income households save;
b. the relative share of earnings going to labor versus capital;
c. the total output of new final goods and services.

Question 8

Into which of the three categories-employed, unemployed, out of the labor force-would an interviewer for the Current Population Survey place each of the following people? Explain.
a. Jennifer Temple is working as a second-grade schoolteacher.
b. Frank Peabody is attending college full-time to earn a degree in elementary education.
c. Martin Hampton is working as a high school social science teacher, but is at home sick with the flu.
d. Kyle Brown does not currently have a job. He wants to be an elementary schoolteacher. He has the appropriate degree. He has not looked for a position in the last month because he doesn't believe schools are currently hiring.
e. Brenda Dewey does not currently have a job. She has sent her resume to several school districts in the past week in the hope of finding a teaching position.

Question 9

Explain which expenditure category of GDP changes and the direction of the change that results for each transaction described.
a. A domestic business purchases a domestically produced computer to use in a business office.
b. A domestic business produces a computer that is sold to a foreign company.
c. The federal government purchases a domestically produced computer to use in a court house.
d. A domestic household purchases a domestically produced computer to use in a home.
e. A domestic household purchases a computer produced in a foreign country to use in a home.