Chapter GDP and the ANSWERS TO CHECKPOINTS Standard of Living CHECKPOINT 5.1: GDP, Income, and Expenditure 5 1. Classify the following items as a final good or an intermediate good and expenditure on final goods as consumption expenditure or investment: The fertilizer bought by a Florida tomato grower. The fertilizer is an intermediate good because it will be used to grow tomatoes. The ringtone you bought today. The ringtone is a final good because you are the final user. It is part of consumption expenditure. New computers bought by PepsiCo. The computers are a final good. Because they are purchased by Pepsi, they are investment. The aircraft bought by Southwest Airlines. The aircraft bought by Southwest Airlines is a final good. Because they are purchased by Southwest Airlines, they are investment. 86 Part 2 . MONITORING THE MACROECONOMY 2. Figure 5.1 shows the flows of expenditure and income on Big Foot Island. In 2007, W was $60 million; V was $20 million; U was $15 million; X was $25 million; and Z was zero. Calculate total income, and net taxes. Total income equals total expenditure and to- tal expenditure equals the sum of consump- tion expenditure, investment, government expenditure on goods and services, and net exports of goods and services. In Figure 5.1, consumption expenditure equals flow W and is $60 million; investment is X and is $25 mil- lion; government expenditure on goods and services is flow U and is $15 million; and, net exports of goods and services is flow Z and is $0. So total expenditure equals $100 million. Total income equals total expenditure, so total income equals $100 million. To calculate net taxes, subtract from house- holds’ total income their consumption expenditure and their saving. Total income equals total expenditure, so total income equals $100 million. Consumption expenditure is $60 million and saving, which is flow V, is $20 million, so net taxes equals $20 million. CHECKPOINT 5.2: Measuring U.S. GDP The table shows some of the items in the U.S. Amount National Income and Product Accounts in (trillions Item of dollars) 2005. Use the table to answer Exercises 1, 2, Wages 6.0 and 3. Government expenditure 2.0 1. Use the income approach to calculate net Interest, rent, and profit 2.4 domestic product at factor cost and the Consumption expenditure 7.4 statistical discrepancy. Investment 1.6 Using the income approach, net domestic Net exports 0 Indirect taxes less subsidies 0.7 product at factor cost = Wages + Interest, Retained profits 1.6 rent, and profit = $6.0 trillion + $2.4 tril- Transfer payments 1.3 lion = $8.4 trillion. Personal income taxes 1.1 The statistical discrepancy equals the GNP 10.5 GDP expenditure total minus the GDP Depreciation 1.3 income total. GDP calculated using the expenditure approach is $11.0 tril- lion. To calculate GDP using the income approach, we add net domestic product at factor cost, indirect taxes less subsidies, and depreciation. So GDP using the income approach equals $8.4 trillion + $0.7 trillion + $1.3 trillion = $10.4 trillion. So the statistical discrepancy equals $11.0 trillion Chapter 5 . GDP and the Standard of Living 87 $10.4 trillion = $600 billion. 2. Calculate the differences between GDP, GNP, and U.S. national income. GNP equals GDP plus net factor income from abroad, so the difference between the two is net factor income from abroad. Net factor income from abroad = GNP GDP, so using the data in the problem, net factor income from abroad = $11.0 trillion $10.5 trillion = $500 billion. U.S. national income = GNP depreciation statistical discrepancy = $10.5 trillion $1.3 trillion $600 billion = $7.6 trillion. 3. Calculate disposable personal income. What percentage of total income is disposable personal income and what percentage of disposable personal income is consumption expenditure? Disposable personal income = national income retained profits plus transfer payments personal income taxes = $7.6 trillion $1.6 trillion + $1.3 trillion $1.1 trillion = $6.2 trillion. As a percentage of U.S. national income, disposable personal income is ($6.2 trillion ÷ $7.6 trillion) 100 = 81.6 percent. As a percentage of dis- posable personal income, consumption is ($7.4 trillion ÷ $6.2 trillion) 100 = 119 percent. 4. The two tables show some data for an economy. If the base year is 2008, calculate the economy’s nominal GDP and real GDP in 2006. GDP data for 2006 Item Quantity Price Nominal GDP equals (60 apples $0.50 per apple) Apples 60 $0.50 + (80 oranges $0.25 per orange) = $50. Real GDP Oranges 80 $0.25 in 2006 is calculated using the 2006 quantities and the 2008 prices. Real GDP equals (60 apples $1.00 per apple) + (80 oranges $2.00 per orange) = $220. GDP data for 2008 Item Quantity Price Apples 160 $1.00 Oranges 220 $2.00 88 Part 2 . MONITORING THE MACROECONOMY CHECKPOINT 5.3: The Use and Limitations of Real GDP 1. The United Nations Human Development Report gives the following da- ta for real GDP per person in 2002: China, $4,580; Russia, $8,230; Canada, $29,480; United States, $35,750. Life expectancy at birth is 79.3 in Canada, 77.0 in the United States, 70.5 in China, and 66.7 in Russia. Freedom House rates political freedom as follows: Canada and the United States, 1.1 (1.0 is the most free); Russia, 4.5; and China, 7.6 (ratings in the 7+ range are the least free). How do life expectancy at birth and political freedom change the relative ranking of living standards that real GDP per person indicate? The relatively high life expectancy and political freedom means Canada’s and the United States’ relative rankings rise. The low life expectancy and political freedom decrease China’s and Russia’s rankings. Chapter 5 . GDP and the Standard of Living 89 ANSWERS TO CHAPTER CHECKPOINT Problems 1. The figure shows the flows of income and expenditure in an economy. In 2007, U was $2 trillion, V was $1.5 trillion, W was $7 tril- lion, X was $1.5 trillion, and Z was zero. Calculate total income, net taxes, and GDP. Total income (which is flow Q) equals total expenditure, the sum of consumption ex- penditure, investment, government ex- penditure on goods and services, and net exports of goods and services. Flow U is government expenditure on goods and services, G; flow W is consumption ex- penditure, C; flow X is investment, I; and flow Z is net exports of goods and services, NX. Total expenditure equals $7 trillion + $1.5 trillion + $2 trillion + $0, which is $10.5 trillion, so total income also equals $10.5 trillion. Net taxes equal total income minus consumption expenditure and saving. Total income is $10.5 trillion. Consumption expenditure is $7 trillion. Sav- ing is the flow into the financial markets (flow V) and equals $1.5 trillion. So net taxes equal $10.5 trillion $7 trillion $1.5 trillion, which is $2 tril- lion. Total income equals total expenditure which equals GDP, so GDP equals $10.5 trillion. The national accounts of Parchment Paradise are kept on (you guessed it) parchment. A fire destroys the statistics office, and the accounts are now in- complete, but the data they contain for 2007 are: GDP (income approach) $2,900 Consumption expenditure $2,000 Indirect taxes less subsidies $100 Interest, rental, and profit $500 Investment $800 Government expenditure $400 Wages $2,000 Net factor income from abroad $50 Net exports were –$200 90 Part 2 . MONITORING THE MACROECONOMY Use this information to calculate the missing data in Problems 2 and 3. 2. GDP (expenditure approach) and depreciation. For the expenditure approach, GDP equals the sum of consumption ex- penditure, investment, government expenditure on goods and services, and net exports. Fortunately, these data were saved from the fire. Hence GDP = C + I + G + NX = $2,000 + $800 + $400 $200 = $3,000. From the income approach, GDP equals the sum of wages plus interest, rent, and profit plus indirect taxes less subsidies plus depreciation. The value of the income approach GDP survived the fire and is $2,900. The sum of wages plus interest, rent, and profit plus indirect taxes less subsi- dies equals $2,000 + $500 + $100 = $2,600. So depreciation equals $2,900 $2,600 = $300. 3. Net domestic product at factor cost, the statistical discrepancy, and GNP. Net domestic product at factor cost equals the sum of wages, interest, rent, and profit. Once again, all these data were fortunately saved from the fire, so net domestic product at factor cost = $2,000 + $500 = $2,500. The statistical discrepancy equals GDP from the expenditure approach, $3,000 from problem 2, minus GDP from the income approach, $2,900. So the statistical discrepancy is $100. GNP equals GDP plus net factor income from abroad. From problem 2, GDP is $3,000. Net factor income from abroad is $50. So GNP equals $3,000 + $50 = $3,050. An economy produces only fun and food. The table GDP data for 2007 shows the quantities of fun and food produced and the Item Quantity Price prices of fun and food in 2007 and 2008. The base year is Fun 40 $2 2007. Use this information to answer Problems 4 and 5. Food 60 $3 4. Calculate nominal GDP in 2007 and 2008. GDP data for 2008 Nominal GDP in 2007 is equal to (40 units of fun Item Quantity Price $2) + (60 units of food $3) = $260. Nominal GDP in Fun 44 $3 2008 is equal to (44 units of fun $3) + (72 units of Food 72 $2 food $2) = $276. 5. Calculate the percentage increase in production in 2008. The percentage increase in production is equal to the percentage increase in real GDP. In the base year, real GDP equals nominal GDP, so real GDP in 2007 is $260. Using prices from 2007, GDP in 2007 is $260 and GDP in 2008 is $304. Using 2007 prices, real GDP grew [($304 $260)/$260] x 100, or 16.9 percent. Retail Sales Rose Slightly in August The Commerce Department reported Friday that retail sales increased 0.3 per- cent in August from July, … The government also said that the current ac- count, the broadest measure of [net exports was] down 3.1 percent from $197.1 Chapter 5 . GDP and the Standard of Living 91 billion in the first three months of the year. … Inventories held by businesses … rose by 0.5 percent in July, the Commerce Department said Friday, while sales at all levels of production were up 1.1 percent. The Associated Press, The New York Times, September 15, 2007 Use this information to answer Problems 6, 7, and 8. 6. Which component of GDP changed because retail sales increased? Which component of GDP changed because inventories held by businesses rose? The increase in retail sales means that consumption expenditure on goods and services increased. The increase in inventories held by businesses means that investment increased. 7. Explain the effect of the fall in net exports on GDP. Because net exports contributes to GDP, the fall in net exports means that GDP decreases. 8. Does the statement that “sales at all levels of production were up 1.1 per- cent” mean that GDP increased by 1.1 percent? Explain your answer. The statement “sales at all levels of production were up 1.1 percent” is ob- scure. If “sales of all levels of production” includes final goods and inter- mediate goods, then GDP is not up 1.1 percent—it is up by less than 1.1 percent. If sales really means “retail sales at all levels of production” then it doesn’t include all final goods and GDP is up by more than 1.1 percent. Exercises 1. Classify each of the following items as a final good or service or an in- termediate good or service and identify which is a component of con- sumption expenditure, investment, or government expenditure on goods and services: Banking services bought by Wal-Mart. Banking services purchased by Wal-Mart is an intermediate service. Security system bought by the White House. The security system purchased by the White House is a final good. It is part of government expenditure on goods and services. Coffee beans bought by Starbucks. Coffee beans purchased by Starbucks are an intermediate good. New coffee grinders bought by Starbucks. New coffee grinders purchased by Starbucks are final goods. They are part of investment. Starbuck’s grande mocha frappuccino bought by a student. The student’s purchase is a final good. It is part of consumption expendi- ture on goods and services. 92 Part 2 . MONITORING THE MACROECONOMY New battle ship bought by the U.S. navy. The new battle ship purchased by the U.S. navy is a final good. It is part of government expenditure on goods and services. 2. You are provided with the following data on the economy of Iberia: GDP $100 billion Net taxes $18 billion Government expenditure on goods and services $20 billion Household saving $15 billion Consumption expenditure $67 billion Investment $21 billion Exports of goods and services $30 billion Calculate Iberia’s imports of goods and services. GDP equals C +I +G +NX. Rearranging, NX = GDP C I G. So Iberia’s net exports equal $100 billion $67 billion $21 billion $20 billion, which is $8 billion. Net exports equal exports imports, so imports equal exports minus net exports. Iberia’s imports equal $30 billion ($8 billion), which is $38 billion. 3. Figure 5.3 shows the flows of income and expenditure in an economy. In 2007, Q was $1,000 billion, U was $250 billion, W was $650 billion, and Z was $50 billion. Calcu- late investment and total income. Flow Q is total income, so total income is $1,000 billion. Total expenditure equals the sum of consumption expenditure (flow W or $650 billion), investment, government expenditure on goods and services (flow U or $250 billion), and net exports of goods and services (flow Z or $50 billion). Total expenditure also equals total income. So using the data in the exercise, $1,000 bil- lion = $650 billion + investment + $250 bil- lion + $50 billion. This equation shows that investment equals $50 billion. 4. Figure 5.3 shows the flows of income and expenditure in an economy. In 2008, X was $2 trillion, R was $3 trillion, Z was –$1trillion, Q was $10 trillion, and U was $4 trillion. Calculate saving and consumption expenditure. Flow Q is total income, so total income is $10 trillion. Total expenditure equals the sum of consumption expenditure, investment (flow X or $2 tril- lion), government expenditure on goods and services (flow U or $4 tril- Chapter 5 . GDP and the Standard of Living 93 lion), and net exports of goods and services (flow Z or $1 trillion). Total expenditure also equals total income. So using the data in the exercise, $10 trillion = consumption expenditure + $2 trillion + $4 trillion $1 trillion. This equation shows that consumption expenditure equals $5 trillion. Households divide their income into consumption expenditure, net taxes, and saving. As a result, total income equals the sum of consumption ex- penditure, net taxes, and saving. Total income is $10 trillion, consumption expenditure is $5 trillion, and net taxes (flow R) is $3 trillion. Hence sav- ing (flow V) is $2 trillion. An economy produces only fish and berries. The GDP data for 2009 tables show the quantities produced and their Item Quantity Price prices in 2009 and 2010. The base year is 2009. Use Fish 50 $3 this information to answer Exercises 5 and 6. Berries 72 $3 5. Calculate nominal GDP in 2009 and 2010 and real GDP in 2009 and 2010. GDP data for 2010 Nominal GDP in 2009 is equal to (50 fish $3) Item Quantity Price + (72 berries $3) = $366. Nominal GDP in Fish 51 $4 2010 is equal to (51 fish $4) + (80 berries Berries 80 $6 $6) = $684. In the base year, real GDP equals nominal GDP, so real GDP in 2009 is $366. Real GDP in 2010 uses 2010 quantities and 2009 prices and so equals (51 fish $3) + (80 berries $3) = $393. 6. Calculate the percentage increase in production in 2010. The percentage increase in production equals the percentage increase in real GDP. Real GDP grew [($393 $366)/$366] x 100, or 7.4 percent. New-Home Sales Hit 7-Year Low Despite huge discounts, sales of new homes last month slowed to their slow- est pace in seven years, setting the stage for further price declines well into next year. … In addition, the government reported that the nation’s gross do- mestic product expanded at an annual rate of 3.8% in the April-to-June quar- ter, slightly less than the 4% estimated earlier. After-tax corporate profits rose 5.2% to $1.15 trillion. … Wall Street Journal, September 28, 2007 Use this information to answer Exercises 7 and 8. 7. Where in the U.S. National Income and Product Accounts and the circular flow of expenditure and income do new home sales appear? How does a fall in new home sales affect real GDP? Explain your answer. New home sales are part of the investment component of expenditure. In the circular flow, they are part of the expenditures coming from the finan- cial markets to the goods markets. A fall in new home sales decreases in- vestment and thereby directly decreases real GDP. 94 Part 2 . MONITORING THE MACROECONOMY 8. If corporate profits rose by 5.2 percent and real GDP increased by 3.8 per- cent, what do you think happened to the compensation of employees? Explain your answer. Corporate profits are part of the “interest, rent, and profit” component of income in the U.S. National Income and Product Accounts. If corporate profits rose by 5.2 percent while real GDP increased by only 3.8 percent, compensation of employees probably grew at less than 3.8 percent, unless “interest and rent” grew so slowly to allow compensation of employees to grow more rapidly. Critical Thinking and Web Activities 1. Boeing outsources the production of some of the components of its new 787 airliner to Japan. At the same time, Toyota outsources the manufac- ture of cars to Kentucky. a. Explain how Boeing’s outsourcing decision affects U.S. GDP, U.S. GNP, and real GDP per person in the United States. Goods and services produced within the United States are part of U.S. GDP. Boeing’s decision to produce part of its new 787 airliner in Ja- pan means that this production is not produced within the United States and so it is not part of U.S. GDP. Goods and services produced anywhere in the world using factors of production supplied by resi- dents of the United States are part of U.S. GNP. Boeing’s decision to produce parts of airliners in Japan means that Boeing will supply U.S. owned factors production to Japan. For instance, U.S. engineers em- ployed by Boeing and working in Japan are a U.S. factor of produc- tion producing a good in another country. So payments to U.S. engi- neers and other U.S. citizens as well as payments to other U.S. factors of production, such as Boeing’s profit, will be included in U.S. GNP. b. Explain how Toyota’s outsourcing decision affects U.S. GDP, U.S. GNP, and real GDP per person in the United States. Goods and services produced within the United States are part of U.S. GDP. So Toyota’s decision to outsource its manufacture of cars to Kentucky means that this production will be included as part of U.S. GDP because it takes place within the United States. Goods and ser- vices produced anywhere in the world using factors of production supplied by residents of the United States are part of U.S. GNP. Some of the factors of production making the Toyota cars are Japanese fac- tors of production, For instance, Japanese engineers working in Ken- tucky are Japanese not U.S. factors of production. The payments to all the Japanese factors of production working in Kentucky are not part of U.S. GNP Chapter 5 . GDP and the Standard of Living 95 2. How do underground economic activities affect the usefulness of the na- tional accounts for comparing the value of production over time and across countries? What underground economic activities do the national accounts miss? Do these activities contribute to the standard of living? Do you think that it would be worth expanding the scope of the accounts to include estimates of the value of underground activities? Underground economic activities undermine (!) the usefulness of the na- tional income accounts. For example, there is a bias in the comparison when comparing GDP in an Eastern European country, where under- ground activities are extensive, with GDP in a Western European country, where underground activities are less extensive. Compared to the West- ern European country, the Eastern European country’s standard of living looks much lower than it actually is. Underground economic activities in- clude jobs done for cash to avoid paying taxes, as well as production and sale of illegal goods and services. Some of these activities contribute to the standard of living. In particular, the jobs off the books done for cash to avoid taxes contribute the same amount to the standard of living as if they were done on the books. In the United States, underground economic ac- tivities are probably not extensive enough to warrant spending a large sum of money to try to measure them. In other countries, though, the amount of underground economic activities may be substantial enough to make measuring them a worthwhile endeavor. 3. The United Nations Human Development Index is based on the levels of GDP per person, life expectancy at birth, and indicators of the quality and quantity of education. Do you think the United Nations should ex- pand its index to include items such as pollution, resource depletion, and political freedom? Are there any other factors that influence the standard of living that you think should be included in a comprehensive measure? If the United Nations is trying to measure the standard of living, pollution and political freedom should be included. The difficulty comes in deter- mining their values. For instance, how much is political freedom valued? Do we add 50 times the measure of political freedom to GDP or do we add 100 times political freedom to GDP? Another important factor that could be included is the value of leisure time. This value is a bit easier to calculate. Leisure time must be at least as valuable as time spent at work (or else more time would be spent at work) so the wage rate provides a good measure of the value of leisure time. The distribution of income might also be used in the United Nation’s measure if the U.N. is interest- ed in measuring the standard of living of a typical person within a nation. 4. Visit the Bureau of Economic Analysis Web site and obtain the most re- cently released National Income and Product Account data for the United 96 Part 2 . MONITORING THE MACROECONOMY States. Also visit the Census Bureau Web site and obtain data on the U.S. population. For the most recently available quarter, a. What are the values of consumption expenditure, investment, gov- ernment expenditure, and net exports? Your students’ answers will vary according to when you assign the problem. By way of example, in October 2007, the most recently re- leased data were for the 2nd quarter of 2007. From the BEA’s Web site, the nominal data are: Consumption expenditure (called “person- al consumption expenditures”), $9,674.0 billion; Investment (called “gross private domestic investment”), $2,139.1 billion; Government expenditures (called “government consumption expenditures and gross investment), $2,670.0; and Net exports, $714.2 billion. (The real data for the same quarter are: Consumption expenditure, $8,244.3 bil- lion; Investment, $1,837.4 billion; Government expenditure, $2,014.8; and Net exports, $573.9 billion.) b. Check that when you sum the items in part a, the total equals GDP. The sum of these four nominal expenditure categories is $13,769.8 bil- lion, which is 0.1 billion different as the reported nominal GDP. The difference is rounding error. (The sum of the four real expenditure categories is $11,522.6 billion, a bit different from the reported real GDP of $11,520.1 billion. Though the students will not be aware of it, the larger difference for the real numbers compared to the nominal numbers is that each of the four real components and real GDP is cal- culated separately using its own chain of growth rates. So the real components will not necessarily sum to equal real GDP.) c. Which of the components of GDP increased the most? Which in- creased the least? Your students’ answers will vary according to when you assign the problem. d. What was real GDP per person in the United States? Your students’ precise answers will vary according to when you as- sign the problem. The answer should be, however, near $38,000 or so. 5. Visit the Bureau of Economic Analysis Web site and obtain the most re- cently released real GDP data—Gross State Product—for the state in which you live. Visit the Census Bureau Web site and obtain data on the population of your state. a. Calculate Gross State Product per person in your state. Compare this number with the U.S. average for the same time period. Your students’ answers will vary according to your state. Chapter 5 . GDP and the Standard of Living 97 b. Which industries in your state contribute most to your state’s produc- tion? Your students’ answers will vary according to your state. 6. Visit the International Monetary Fund World Economic Outlook Web site and obtain data for 1980 and the current year for the United States and Japan that enable you to answer the following questions. a. Which country had the greater increase in real GDP per person? Your students’ answers will vary according to when you assign the problem. For an example of an answer, using the data available in 2007, U.S. real GDP per person in constant dollars in 1980 was $22,676.53 and in 2005 was $38,529.35. So in the United States, real GDP per person grew by [($38,529.35 $22,676.53) ÷ $22,676.53] × 100 = 69.9 percent. In Japan, Japanese real GDP per person in constant yen in 1980 was ¥2,585,333 and in 2005 was ¥4,392,160. In Japan over these years real GDP per person grew by [(¥4,392,160 ¥2,585,333) ÷ ¥2,585,333] × 100 = 69.9 percent. So in October, 2007, both countries had enjoyed virtually the identical growth rate of about 70 percent. (Source: http://www.imf.org/external/pubs/ft/weo/2007/01/data/weoselco.aspx? g=110&sg=All+countries+%2f+Advanced+economies). b. What is the GDP of each country as a percentage of world GDP? Your students’ answers will vary according to when you assign the problem. For example, in October 2007, the U.S. GDP was 19.7 percent of world GDP and the Japanese GDP was 6.3 percent of world GDP. (http://www.imf.org/external/pubs/ft/weo/2007/01/pdf/statappx.pdf) c. What do you learn from your answers to parts a and b about the stan- dard of living in Japan and the United States? Your students’ answers might vary according to when you assign the problem. In general, however, part (a) shows that U.S. real GDP per person grew more rapidly that Japanese real GDP per person, so the standard of living grew more rapidly in the United States. Part (b) shows that the United States is a distinctly larger part of the world economy than is Japan. 98 Part 2 . MONITORING THE MACROECONOMY ADDITIONAL EXERCISES FOR ASSIGNMENT Questions CHECKPOINT 5.1: GDP, Income, and Expenditure 1. Identify each of the following as either included or not included in GDP. Make sure to give an explanation for those that you judge as not included. In addition, state whether each included item is consumption, investment, government expenditure, or net exports. 1a. The purchase of copy paper by PepsiCo, which is used by the company staff. 1b. The purchase of an electronic handheld organizer by a sales manager to keep track of clients. 1c. The purchase of a new aircraft carrier by the Navy. 1d. An increase in Dell’s inventory of unsold personal computers. 1e. A family eating dinner at Taco Bell. 1f. The salary of the President of the United States. 1g. A Mom baking a birthday cake for her 8 year-old daughter. 1h. The sale of a used computer. 1i. Your donation of a used computer to a local elementary school. 1j. The purchase by a German resident in Germany of an American-made ceil- ing fan produced in the United States. CHECKPOINT 5.2: Measuring U.S. GDP Item Dollars Consumption expenditure 800 Investment 400 Government expenditures 200 Exports 50 Imports 75 Depreciation 100 2. Using the information in the table above, calculate GDP. Amount Item (trillions of dollars) Consumption expenditure 4.97 Investment 1.14 Government expenditures 1.37 Net exports 0.08 Wages 4.20 Interest, rent, and profit 1.68 Depreciation 0.89 3. The table above gives some of the items in the U.S. National Income and Product Accounts in 1995. Chapter 5 . GDP and the Standard of Living 99 3a. Use the expenditure approach to calculate U.S. GDP in 1995. 3b. Use the income approach to calculate U.S. net domestic product at factor cost in 1995. 3c. Calculate GDP minus net domestic product at factor cost in 1995. 3d. Calculate indirect taxes less subsidies in 1995. Answers CHECKPOINT 5.1: GDP, Income, and Expenditure 1a. Not included because it is an intermediate good. 1b. Included as part of investment. 1c. Included as part of government expenditures. 1d. Included as part of investment. 1e. Included as part of consumption expenditure. 1f. Included as part of government purchases. 1g. Not included because it is household production. 1h. Not included because it was included in GDP in the year it was produced. 1i. Not included because it was included in GDP in the year it was produced. 1j. Included as part of net exports. CHECKPOINT 5.2: Measuring U.S. GDP 2. GDP equals the sum of consumption expenditure, investment, government expenditure on goods and services, and net exports. So GDP = $800 + $400 + $200 + ($50 $75), which is $1,375. The amount of depreciation is not used. 3a. Using the expenditure approach, GDP = C + I + G + NX = $4.97 trillion + $1.14 trillion + $1.37 trillion $0.08 trillion = $7.40 trillion. 3b. Using the income approach, net domestic product at factor cost = Wages + Interest, rent, and profit = $4.20 trillion + $1.68 trillion = $5.88 trillion. 3c. GDP minus net domestic product at factor cost = $7.40 trillion $5.88 tril- lion = $1.52 trillion. 3d. The difference between GDP and net domestic product at factor cost, $1.52 trillion, is equal to depreciation plus (indirect taxes minus subsidies). From the table, depreciation, $0.89 trillion. So indirect taxes minus subsidies = $1.52 trillion $0.89 trillion = $0.63 trillion.
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