,Solution manual for Macroeconomics Theory and
Applications , 1st Edition Robert Lester
Notes
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2- We have shown you 10 or five pages.
3- The file contains all Appendix and Excel
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, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
Instructor Manual
Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449;
Chapter 1: Defining and Measuring GDP
TABLE OF CONTENTS
Purpose and Perspective of the Chapter..................................................................................2
Chapter Objectives......................................................................................................................2
Key Terms....................................................................................................................................2
Chapter Outline ........................................................................................................................... 3
Answers to End of Chapter Questions......................................................................................5
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 1
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
PURPOSE AND PERSPECTIVE OF THE CHAPTER
The purpose of this chapter is to understand one of the primary macroeconomic variables: gross
domestic product (GDP). GDP measures production within a country and across time. GDP per
capita gives a measure of the average income per person and is used as a proxy for the
average standard of living of a country’s citizens. GDP is not a perfect measure of well-being,
but it is correlated with several quality-of-life variables. Accurate GDP measurements show how
production changes over time and enable cross-country comparisons of production and income.
Furthermore, GDP can inform policymakers and help them make decisions that improve a
country’s economic performance.
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
1.1 Calculate GDP using the income, expenditure, and value-added approaches.
1.2 Distinguish between real and nominal GDP and calculate the GDP deflator.
1.3 Explain the concept of purchasing power parity and how that affects measured cross-
country income differences.
1.4 List the stylized facts of economic growth.
1.5 Critically evaluate GDP per person as an accurate measure of living standards.
KEY TERMS
Capital good: A machine, piece of equipment, or physical operating space used by a business.
Depreciation: The decline in value of capital goods associated with physical deterioration and
obsolescence.
Durable good: A good that physically persists despite being used. The BEA defines a durable
good as a good with an average useful life of at least three years.
GDP deflator: A country’s nominal GDP divided by its real GDP.
GDP per capita: GDP divided by a country’s population.
GDP per worker: GDP divided by a country's workforce.
Gross domestic product (GDP): The current dollar value of all final goods and services
produced in a country in a year.
Gross national income (GNI): The sum of all forms of income earned by a nation’s citizens.
Inflation: An increase in the average price level.
Intermediate good: A good that is not yet ready for final consumption or investment.
Nominal GDP: A country’s GDP calculated using current-year prices.
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 2
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
Purchasing power parity exchange rate: Exchange rate that corrects for differences in price
levels across countries.
Real GDP: A country’s GDP calculated using constant prices.
Rule of 70: An equation used to determine how long it takes an economy to double its income
per capita.
Transfer payment: Moving money or resources from one person to another without anything
being produced.
[return to top]
CHAPTER OUTLINE
The following outline organizes content (including any activities in the PowerPoints) by topic and
learning objective.
I. Introduction (PPT Slides 1-4)
a. Icebreaker Activity: 20 minutes total. Present the Icebreaker slide. Have
students work in pairs or small groups to answer the questions. Ask volunteers to
share their answers and discuss some of these as a class.
b. Chapter Objectives
II. Gross domestic product (GDP) is the current dollar value of all final goods and services
produced in a country in a year. (PPT Slides 5-11)
a. Ideally, GDP would include the value of all production. In practice, goods and
services for which no transaction is recorded are omitted from GDP, such as
household production.
b. Knowledge Check Activity: 10 minutes total. Present Knowledge Check 1-1.
You can ask students to work on this question individually or in pairs or small
groups. Share and discuss the answers.
c. Think, Pair, Share Activity: 20 minutes total. Present the activity slide. Have
students brainstorm potential shortcomings to GDP. Use this as a transition to
discuss Application 1.1.
III. There are three approaches to calculate GDP: the value-added approach, the income
approach, and the expenditure approach. (LO 1.1, PPT Slides 12-28)
a. The value-added approach sums the increase in value associated with each
stage of production.
b. The income approach sums the total payments going to each input. The total is
gross national income (GNI). The income approach divides income into
i. Compensation to employees,
ii. Taxes on production and imports less subsidies,
iii. Consumption of fixed capital, and
iv. Net operating surplus.
c. The expenditure approach divides income into
i. Private consumption,
ii. Private investment,
iii. Government consumption and investment, and
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 3
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
iv. Net exports.
d. The accounting identity states that total value added, total income, and total
expenditure are always equal.
e. Knowledge Check Activity: 10 minutes total. Present Knowledge Check 1-2.
You can ask students to work on this question individually or in pairs or small
groups. Share and discuss the answers.
IV. GDP can increase because the production of goods and services increases or because
prices increase. (LO 1.2, PPT Slides 29-36)
a. Nominal GDP measures production using current-year prices.
b. Real GDP measures how the quantity of goods and services produced changes
from year to year holding prices fixed.
c. The GDP deflator is the ratio of a country’s nominal GDP to real GDP. It provides
a measure of the overall price level and can be used to calculate inflation.
d. Knowledge Check Activity: 10 minutes total. Present Knowledge Check 1-3.
You can ask students to work on this question individually or in pairs or small
groups. Share and discuss the answers.
V. Purchasing power parity exchange rates correct for differences in prices of the same
goods and services across countries. (LO 1.3, PPT Slides 37-38)
VI. There is wide variation in GDP levels and GDP growth rates across countries and across
time. (LO 1.4, PPT Slides 39-47)
a. Explore Your World Activity: 30 minutes total. Present the activity slides or
distribute these as handouts. Have students complete the tables. Share and
discuss the completed tables with students. (You can also have students
complete the tables before class and reserve class time for discussion. This
would decrease the in-class time for this activity to 10-15 minutes.)
b. There are certain stylized facts of economic growth, including:
i. GDP per capita varies widely across countries.
ii. The growth rate of GDP per capita varies widely across time.
iii. There were growth miracles over the past 70 years.
c. Small changes in growth rates have large effects over time. The rule of 70 is an
equation used to determine how long it takes an economy to double its income
per capita.
VII. GDP is not a perfect measure of well-being, but it is a good proxy for it. (LO 1.5, PPT
Slides 48-50)
a. GDP is positively correlated with life expectancy, consumption, and carbon
dioxide emissions. GDP is negatively correlated with infant mortality.
b. Overall, the evidence shows that the quality and quantity of life are higher in rich
countries.
VIII. Summary (PPT Slide 51)
[return to top]
ANSWERS TO END OF CHAPTER QUESTIONS
Questions for Review:
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 4
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
1. Taking your car to the carwash is a service that is counted in GDP. Washing your car by
yourself is also a service, but it is not recorded in GDP. The reason is that no transaction is
recorded.
2. GDP would decrease. This does not mean people are worse off.
3. The first reason is that prices may have increased over the last year. This would raise
nominal GDP but not affect living standards. The second reason is that population may have
increased. A bigger population would produce more output but leave output per person the
same.
4. GDP measures domestic production. Consumption, investment, and government spending
include goods and services produced domestically and abroad. Subtracting imports isolates
the value of goods and services produced domestically.
5. Real GDP per capita is highly correlated with other metrics of living standards such as
consumption and life expectancy. Some forms of pollution are higher in countries with high
per capita GDP. By and large, GDP per capita is a good measure of living standards.
Problems:
1. Refer to the table in the problem.
a. Use the equations for NGDP, RGDP, and the GDP deflator:
𝑁𝐺𝐷𝑃 2021 = 𝑝𝑎𝑣𝑜𝑐𝑎𝑑𝑜,21 𝑞 𝑎𝑣𝑜𝑐𝑎𝑔𝑜,21 + 𝑝𝑝𝑒𝑝𝑝𝑒𝑟𝑠,21 𝑞 𝑝𝑒𝑝𝑝𝑒𝑟𝑠,21
= $0.90 ∗ 2,500 + $1.40 ∗ 3,000
= $6,450
𝑁𝐺𝐷𝑃 2022 = 𝑝𝑎𝑣𝑜𝑐𝑎𝑑𝑜,22 𝑞 𝑎𝑣𝑜𝑐𝑎𝑔𝑜,22 + 𝑝𝑝𝑒𝑝𝑝𝑒𝑟𝑠,22 𝑞 𝑝𝑒𝑝𝑝𝑒𝑟𝑠,22
= $1.05 ∗ 2,750 + $1.45 ∗ 3,400
= $7,8157.5
𝑁𝐺𝐷𝑃 2023 = 𝑝𝑎𝑣𝑜𝑐𝑎𝑑𝑜,23 𝑞 𝑎𝑣𝑜𝑐𝑎𝑔𝑜,23 + 𝑝𝑝𝑒𝑝𝑝𝑒𝑟𝑠,23 𝑞 𝑝𝑒𝑝𝑝𝑒𝑟𝑠,23
= $1.20 ∗ 2,800 + $1.70 ∗ 3,600
= $9,480
𝑅𝐺𝐷𝑃 2021 = 𝑝𝑎𝑣𝑜𝑐𝑎𝑑𝑜,22 𝑞 𝑎𝑣𝑜𝑐𝑎𝑔𝑜,21 + 𝑝𝑝𝑒𝑝𝑝𝑒𝑟𝑠,22 𝑞 𝑝𝑒𝑝𝑝𝑒𝑟𝑠,21
= $1.05 ∗ 2,500 + $1.45 ∗ 3,000
= $6,975
𝑅𝐺𝐷𝑃 2022 = 𝑝𝑎𝑣𝑜𝑐𝑎𝑑𝑜,22 𝑞 𝑎𝑣𝑜𝑐𝑎𝑔𝑜,22 + 𝑝𝑝𝑒𝑝𝑝𝑒𝑟𝑠,22 𝑞 𝑝𝑒𝑝𝑝𝑒𝑟𝑠,22
= $1.05 ∗ 2,750 + $1.45 ∗ 3,400
= $7,8157.5
𝑅𝐺𝐷𝑃 2023 = 𝑝𝑎𝑣𝑜𝑐𝑎𝑑𝑜,22 𝑞 𝑎𝑣𝑜𝑐𝑎𝑔𝑜,23 + 𝑝𝑝𝑒𝑝𝑝𝑒𝑟𝑠,22 𝑞 𝑝𝑒𝑝𝑝𝑒𝑟𝑠,23
= $1.05 ∗ 2,800 + $1.45 ∗ 3,600
= $8,160
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 5
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
𝑁𝐺𝐷𝑃 2021
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 2021 = ∗ 100
𝑅𝐺𝐷𝑃 2021
= 92.47
𝑁𝐺𝐷𝑃 2022
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 2022 = ∗ 100
𝑅𝐺𝐷𝑃 2022
= 100
𝑁𝐺𝐷𝑃 2023
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 2023 = ∗ 100
𝑅𝐺𝐷𝑃 2023
= 116.18
b. The percent change in nominal GDP is 21.20%. The percent change in real GDP is
12.08%. The percent change in the GDP deflator is 8.14%.
c. Real GDP growth between 2022 and 2023 was 4.38%. Because population is
constant across all three years, we can infer that GDP per capita increased by more
(both in percent terms and in total) in 2022. If you believe GDP per capita is a good
measure of economic well-being, then well-being increased more in 2022.
2. The value added of the peach industry is $2 * (2,000 + 1,000) = $6,000. Net operating
surplus is the difference between value added and wages and consumption of fixed
capital. So, net operating surplus is $6,000 - $4,000 - $500 = $1,500. Value added in the
pie industry is the difference between revenue and intermediate inputs, or $12,000 -
$2,000 = $10,000. Net operating surplus is the difference between value added, wages,
and consumption of fixed capital. So, net operating surplus is $10,000 - $6,000 - $1,000
= $3,000.
Peaches (in pounds) Peach pies
Price per unit $2 $12
Quantity sold to final users 2,000 1,000
Quantity sold as intermediate 1,000 0
goods
Wages $4,000 $6,000
Consumption of fixed capital $500 $1,000
Net operating surplus $1,500 $3,000
GDP is the sum of value added in the peach and pie industry, or $6,000 + $10,000 =
$16,000. You can also derive GDP by summing wages, consumption of fixed capital,
and net operating surplus across industries: $4,000 + $6,000 + $500 + $1,000 + $2,500
+ $3,000 = $16,000.
3. The sale of new residential houses counts as residential fixed investment. The sale of
new factories counts as nonresidential fixed investment. The contribution of new
residential houses to GDP is 25,000 * $400,000 = $10,000,000,000. The contribution of
new factories to GDP is 20,000 * $1,500,000 = 30,000,000,000. The realtor fees for the
used houses and factories get counted toward GDP. The contribution is 25,000 * $8,000
= 200,000,000 for residential houses and 20,000 * $15,000 = 300,000,000. Note that the
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 6
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
realtor fees for the new houses and factories do not count towards GDP because that
would be double counting.
4. Refer to the table in the problem.
a. Median income in any year can be calculated as $60,000 ∗ 1 + 0.03 𝑡−2023
. Using this
formula, we can fill in the second row of the table.
2023 2033 2043 2053
10th percentile $30,000 $40,317 $54,183 $72,818
Median $60,000 $80,635 $108,367 $145,636
b. Median income in any year can be calculated as $60,000 ∗ 1 + 0.01 𝑡−2023
. Using this
formula, we can fill in the second row of the table.
2023 2033 2043 2053
10th percentile $54,000 $59,649 $65,890 $72,784
Median $60,000 $66,277 $73,211 $80,871
c. It’s close, but the economy in part (a) has a higher level of income at the 10th
percentile.
d. The formula is:
$30,000 ∗ 1.03𝑡 = $54,000 ∗ 1.01𝑡
⇔ 1.02𝑡 = 1.8
⇔ 𝑡 ln 1.02 = ln 1.8
⇔ 𝑡 ≈ 29.7.
So, just short of 30 years.
5. Refer to the table in the problem.
a. Value added is the difference between gross output and intermediate inputs.
Construction 2022 2023
Gross output $712 $760
Intermediate inputs $204 $226
Value added $508 $534
Industry deflator 105 107
Manufacturing
Gross output $1,240 $1,310
Intermediate inputs $260 $308
Value added $980 $1,002
Industry deflator 103 99
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 7
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
b. Real GDPs in for construction and manufacturing in 2022 are $508/1.05 = $484 and
$980/1.03 = $951. Real GDP for the economy is 2022 is $1,435. Real GDPs in for
construction and manufacturing in 2023 are $534/1.07 = $499 and $1,002/99 =
$1,012. Real GDP for the economy in 2023 is $1,511.
[return to top]
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 8
posted to a publicly accessible website, in whole or in part.
Applications , 1st Edition Robert Lester
Notes
1- The file is chapter after chapter.
2- We have shown you 10 or five pages.
3- The file contains all Appendix and Excel
sheet if it exists.
4- We have all what you need, we make
update at every time. There are many
new editions waiting you.
5- If you think you purchased the wrong file
You can contact us at every time, we can
replace it with true one.
Our email:
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
Instructor Manual
Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449;
Chapter 1: Defining and Measuring GDP
TABLE OF CONTENTS
Purpose and Perspective of the Chapter..................................................................................2
Chapter Objectives......................................................................................................................2
Key Terms....................................................................................................................................2
Chapter Outline ........................................................................................................................... 3
Answers to End of Chapter Questions......................................................................................5
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 1
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
PURPOSE AND PERSPECTIVE OF THE CHAPTER
The purpose of this chapter is to understand one of the primary macroeconomic variables: gross
domestic product (GDP). GDP measures production within a country and across time. GDP per
capita gives a measure of the average income per person and is used as a proxy for the
average standard of living of a country’s citizens. GDP is not a perfect measure of well-being,
but it is correlated with several quality-of-life variables. Accurate GDP measurements show how
production changes over time and enable cross-country comparisons of production and income.
Furthermore, GDP can inform policymakers and help them make decisions that improve a
country’s economic performance.
CHAPTER OBJECTIVES
The following objectives are addressed in this chapter:
1.1 Calculate GDP using the income, expenditure, and value-added approaches.
1.2 Distinguish between real and nominal GDP and calculate the GDP deflator.
1.3 Explain the concept of purchasing power parity and how that affects measured cross-
country income differences.
1.4 List the stylized facts of economic growth.
1.5 Critically evaluate GDP per person as an accurate measure of living standards.
KEY TERMS
Capital good: A machine, piece of equipment, or physical operating space used by a business.
Depreciation: The decline in value of capital goods associated with physical deterioration and
obsolescence.
Durable good: A good that physically persists despite being used. The BEA defines a durable
good as a good with an average useful life of at least three years.
GDP deflator: A country’s nominal GDP divided by its real GDP.
GDP per capita: GDP divided by a country’s population.
GDP per worker: GDP divided by a country's workforce.
Gross domestic product (GDP): The current dollar value of all final goods and services
produced in a country in a year.
Gross national income (GNI): The sum of all forms of income earned by a nation’s citizens.
Inflation: An increase in the average price level.
Intermediate good: A good that is not yet ready for final consumption or investment.
Nominal GDP: A country’s GDP calculated using current-year prices.
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 2
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
Purchasing power parity exchange rate: Exchange rate that corrects for differences in price
levels across countries.
Real GDP: A country’s GDP calculated using constant prices.
Rule of 70: An equation used to determine how long it takes an economy to double its income
per capita.
Transfer payment: Moving money or resources from one person to another without anything
being produced.
[return to top]
CHAPTER OUTLINE
The following outline organizes content (including any activities in the PowerPoints) by topic and
learning objective.
I. Introduction (PPT Slides 1-4)
a. Icebreaker Activity: 20 minutes total. Present the Icebreaker slide. Have
students work in pairs or small groups to answer the questions. Ask volunteers to
share their answers and discuss some of these as a class.
b. Chapter Objectives
II. Gross domestic product (GDP) is the current dollar value of all final goods and services
produced in a country in a year. (PPT Slides 5-11)
a. Ideally, GDP would include the value of all production. In practice, goods and
services for which no transaction is recorded are omitted from GDP, such as
household production.
b. Knowledge Check Activity: 10 minutes total. Present Knowledge Check 1-1.
You can ask students to work on this question individually or in pairs or small
groups. Share and discuss the answers.
c. Think, Pair, Share Activity: 20 minutes total. Present the activity slide. Have
students brainstorm potential shortcomings to GDP. Use this as a transition to
discuss Application 1.1.
III. There are three approaches to calculate GDP: the value-added approach, the income
approach, and the expenditure approach. (LO 1.1, PPT Slides 12-28)
a. The value-added approach sums the increase in value associated with each
stage of production.
b. The income approach sums the total payments going to each input. The total is
gross national income (GNI). The income approach divides income into
i. Compensation to employees,
ii. Taxes on production and imports less subsidies,
iii. Consumption of fixed capital, and
iv. Net operating surplus.
c. The expenditure approach divides income into
i. Private consumption,
ii. Private investment,
iii. Government consumption and investment, and
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 3
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
iv. Net exports.
d. The accounting identity states that total value added, total income, and total
expenditure are always equal.
e. Knowledge Check Activity: 10 minutes total. Present Knowledge Check 1-2.
You can ask students to work on this question individually or in pairs or small
groups. Share and discuss the answers.
IV. GDP can increase because the production of goods and services increases or because
prices increase. (LO 1.2, PPT Slides 29-36)
a. Nominal GDP measures production using current-year prices.
b. Real GDP measures how the quantity of goods and services produced changes
from year to year holding prices fixed.
c. The GDP deflator is the ratio of a country’s nominal GDP to real GDP. It provides
a measure of the overall price level and can be used to calculate inflation.
d. Knowledge Check Activity: 10 minutes total. Present Knowledge Check 1-3.
You can ask students to work on this question individually or in pairs or small
groups. Share and discuss the answers.
V. Purchasing power parity exchange rates correct for differences in prices of the same
goods and services across countries. (LO 1.3, PPT Slides 37-38)
VI. There is wide variation in GDP levels and GDP growth rates across countries and across
time. (LO 1.4, PPT Slides 39-47)
a. Explore Your World Activity: 30 minutes total. Present the activity slides or
distribute these as handouts. Have students complete the tables. Share and
discuss the completed tables with students. (You can also have students
complete the tables before class and reserve class time for discussion. This
would decrease the in-class time for this activity to 10-15 minutes.)
b. There are certain stylized facts of economic growth, including:
i. GDP per capita varies widely across countries.
ii. The growth rate of GDP per capita varies widely across time.
iii. There were growth miracles over the past 70 years.
c. Small changes in growth rates have large effects over time. The rule of 70 is an
equation used to determine how long it takes an economy to double its income
per capita.
VII. GDP is not a perfect measure of well-being, but it is a good proxy for it. (LO 1.5, PPT
Slides 48-50)
a. GDP is positively correlated with life expectancy, consumption, and carbon
dioxide emissions. GDP is negatively correlated with infant mortality.
b. Overall, the evidence shows that the quality and quantity of life are higher in rich
countries.
VIII. Summary (PPT Slide 51)
[return to top]
ANSWERS TO END OF CHAPTER QUESTIONS
Questions for Review:
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 4
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
1. Taking your car to the carwash is a service that is counted in GDP. Washing your car by
yourself is also a service, but it is not recorded in GDP. The reason is that no transaction is
recorded.
2. GDP would decrease. This does not mean people are worse off.
3. The first reason is that prices may have increased over the last year. This would raise
nominal GDP but not affect living standards. The second reason is that population may have
increased. A bigger population would produce more output but leave output per person the
same.
4. GDP measures domestic production. Consumption, investment, and government spending
include goods and services produced domestically and abroad. Subtracting imports isolates
the value of goods and services produced domestically.
5. Real GDP per capita is highly correlated with other metrics of living standards such as
consumption and life expectancy. Some forms of pollution are higher in countries with high
per capita GDP. By and large, GDP per capita is a good measure of living standards.
Problems:
1. Refer to the table in the problem.
a. Use the equations for NGDP, RGDP, and the GDP deflator:
𝑁𝐺𝐷𝑃 2021 = 𝑝𝑎𝑣𝑜𝑐𝑎𝑑𝑜,21 𝑞 𝑎𝑣𝑜𝑐𝑎𝑔𝑜,21 + 𝑝𝑝𝑒𝑝𝑝𝑒𝑟𝑠,21 𝑞 𝑝𝑒𝑝𝑝𝑒𝑟𝑠,21
= $0.90 ∗ 2,500 + $1.40 ∗ 3,000
= $6,450
𝑁𝐺𝐷𝑃 2022 = 𝑝𝑎𝑣𝑜𝑐𝑎𝑑𝑜,22 𝑞 𝑎𝑣𝑜𝑐𝑎𝑔𝑜,22 + 𝑝𝑝𝑒𝑝𝑝𝑒𝑟𝑠,22 𝑞 𝑝𝑒𝑝𝑝𝑒𝑟𝑠,22
= $1.05 ∗ 2,750 + $1.45 ∗ 3,400
= $7,8157.5
𝑁𝐺𝐷𝑃 2023 = 𝑝𝑎𝑣𝑜𝑐𝑎𝑑𝑜,23 𝑞 𝑎𝑣𝑜𝑐𝑎𝑔𝑜,23 + 𝑝𝑝𝑒𝑝𝑝𝑒𝑟𝑠,23 𝑞 𝑝𝑒𝑝𝑝𝑒𝑟𝑠,23
= $1.20 ∗ 2,800 + $1.70 ∗ 3,600
= $9,480
𝑅𝐺𝐷𝑃 2021 = 𝑝𝑎𝑣𝑜𝑐𝑎𝑑𝑜,22 𝑞 𝑎𝑣𝑜𝑐𝑎𝑔𝑜,21 + 𝑝𝑝𝑒𝑝𝑝𝑒𝑟𝑠,22 𝑞 𝑝𝑒𝑝𝑝𝑒𝑟𝑠,21
= $1.05 ∗ 2,500 + $1.45 ∗ 3,000
= $6,975
𝑅𝐺𝐷𝑃 2022 = 𝑝𝑎𝑣𝑜𝑐𝑎𝑑𝑜,22 𝑞 𝑎𝑣𝑜𝑐𝑎𝑔𝑜,22 + 𝑝𝑝𝑒𝑝𝑝𝑒𝑟𝑠,22 𝑞 𝑝𝑒𝑝𝑝𝑒𝑟𝑠,22
= $1.05 ∗ 2,750 + $1.45 ∗ 3,400
= $7,8157.5
𝑅𝐺𝐷𝑃 2023 = 𝑝𝑎𝑣𝑜𝑐𝑎𝑑𝑜,22 𝑞 𝑎𝑣𝑜𝑐𝑎𝑔𝑜,23 + 𝑝𝑝𝑒𝑝𝑝𝑒𝑟𝑠,22 𝑞 𝑝𝑒𝑝𝑝𝑒𝑟𝑠,23
= $1.05 ∗ 2,800 + $1.45 ∗ 3,600
= $8,160
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 5
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
𝑁𝐺𝐷𝑃 2021
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 2021 = ∗ 100
𝑅𝐺𝐷𝑃 2021
= 92.47
𝑁𝐺𝐷𝑃 2022
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 2022 = ∗ 100
𝑅𝐺𝐷𝑃 2022
= 100
𝑁𝐺𝐷𝑃 2023
𝐺𝐷𝑃 𝐷𝑒𝑓𝑙𝑎𝑡𝑜𝑟 2023 = ∗ 100
𝑅𝐺𝐷𝑃 2023
= 116.18
b. The percent change in nominal GDP is 21.20%. The percent change in real GDP is
12.08%. The percent change in the GDP deflator is 8.14%.
c. Real GDP growth between 2022 and 2023 was 4.38%. Because population is
constant across all three years, we can infer that GDP per capita increased by more
(both in percent terms and in total) in 2022. If you believe GDP per capita is a good
measure of economic well-being, then well-being increased more in 2022.
2. The value added of the peach industry is $2 * (2,000 + 1,000) = $6,000. Net operating
surplus is the difference between value added and wages and consumption of fixed
capital. So, net operating surplus is $6,000 - $4,000 - $500 = $1,500. Value added in the
pie industry is the difference between revenue and intermediate inputs, or $12,000 -
$2,000 = $10,000. Net operating surplus is the difference between value added, wages,
and consumption of fixed capital. So, net operating surplus is $10,000 - $6,000 - $1,000
= $3,000.
Peaches (in pounds) Peach pies
Price per unit $2 $12
Quantity sold to final users 2,000 1,000
Quantity sold as intermediate 1,000 0
goods
Wages $4,000 $6,000
Consumption of fixed capital $500 $1,000
Net operating surplus $1,500 $3,000
GDP is the sum of value added in the peach and pie industry, or $6,000 + $10,000 =
$16,000. You can also derive GDP by summing wages, consumption of fixed capital,
and net operating surplus across industries: $4,000 + $6,000 + $500 + $1,000 + $2,500
+ $3,000 = $16,000.
3. The sale of new residential houses counts as residential fixed investment. The sale of
new factories counts as nonresidential fixed investment. The contribution of new
residential houses to GDP is 25,000 * $400,000 = $10,000,000,000. The contribution of
new factories to GDP is 20,000 * $1,500,000 = 30,000,000,000. The realtor fees for the
used houses and factories get counted toward GDP. The contribution is 25,000 * $8,000
= 200,000,000 for residential houses and 20,000 * $15,000 = 300,000,000. Note that the
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 6
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
realtor fees for the new houses and factories do not count towards GDP because that
would be double counting.
4. Refer to the table in the problem.
a. Median income in any year can be calculated as $60,000 ∗ 1 + 0.03 𝑡−2023
. Using this
formula, we can fill in the second row of the table.
2023 2033 2043 2053
10th percentile $30,000 $40,317 $54,183 $72,818
Median $60,000 $80,635 $108,367 $145,636
b. Median income in any year can be calculated as $60,000 ∗ 1 + 0.01 𝑡−2023
. Using this
formula, we can fill in the second row of the table.
2023 2033 2043 2053
10th percentile $54,000 $59,649 $65,890 $72,784
Median $60,000 $66,277 $73,211 $80,871
c. It’s close, but the economy in part (a) has a higher level of income at the 10th
percentile.
d. The formula is:
$30,000 ∗ 1.03𝑡 = $54,000 ∗ 1.01𝑡
⇔ 1.02𝑡 = 1.8
⇔ 𝑡 ln 1.02 = ln 1.8
⇔ 𝑡 ≈ 29.7.
So, just short of 30 years.
5. Refer to the table in the problem.
a. Value added is the difference between gross output and intermediate inputs.
Construction 2022 2023
Gross output $712 $760
Intermediate inputs $204 $226
Value added $508 $534
Industry deflator 105 107
Manufacturing
Gross output $1,240 $1,310
Intermediate inputs $260 $308
Value added $980 $1,002
Industry deflator 103 99
© 2024 Cengage Learning, Inc. All Rights Reserved. May not be scanned, copied or duplicated, or 7
posted to a publicly accessible website, in whole or in part.
, Instructor Manual: Robert Lester, Macroeconomics: Theory and Applications 2024, 9780357723449; Chapter 1: Defining and
Measuring GDP
b. Real GDPs in for construction and manufacturing in 2022 are $508/1.05 = $484 and
$980/1.03 = $951. Real GDP for the economy is 2022 is $1,435. Real GDPs in for
construction and manufacturing in 2023 are $534/1.07 = $499 and $1,002/99 =
$1,012. Real GDP for the economy in 2023 is $1,511.
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