Problem Session-2

ISL244E Macroeconomics
Problem Session-2
Research Assistant
Serkan Değirmenci
(Ph.D. Candidate)
# Today #
• B (2009), Macroeconomics:
- Chapter 2: A Tour of the Book (Pages: 41-61)
Dig Deeper (DD): 7 (Page: 59)
• GNH (2009), Macroeconomics in Context:
- Chapter 5: Macro. Measurement: The
Current Approach (Pages: 95-124)
Exercises (E): 3-4-6-10 (Page: 121-122)
- Chapter 6: Macro. Measurement:
Environmental and Social Dimension (Pages:
Exercises (E): 6-7-10 (Page: 147-148)
Chapter 2: DD-7 (Page: 59)
Measured and true GDP
Suppose that instead of cooking dinner for an hour, you decide to work an
extra hour, earning an additional $12. You then purchase some (takeout)
Chinese food, which costs you $10.
a. By how much does measured GDP increase?
b. Do you think the increase in measured GDP accurately reflects the effect on
output of your decision to work? Explain.
ANSWER: (Textbook: p. 42-48)
a. Measured GDP increases by $10+$12=$22. (Strictly, this involves mixing
the final goods and income approaches to GDP. Assume here that the $12 per
hour of work creates a final good worth $12.)
b. No. The true value of your decision to work should be less than $22.
If you choose to work, the economy produces the value of your work plus a
takeout meal. If you choose not to work, presumably the economy produces a
home-cooked meal. The extra output arising from your choice to work is the
value of your work plus any difference in value between takeout and homecooked meals. In fact, however, the value of home-cooked meals is not
counted in GDP. (Of course, there are other details. For example, the value of
groceries used to produce home-cooked meals would be counted in GDP.
Putting such details aside, however, the basic point is clear.)
Chapter 5: E-3 (Page: 121)
• In which line (or lines) of Table 5.4 (the income approach) would the value
of each of the following be counted? If it is part of “net income flows from
the rest of the world” explain whether it reflects domestic (or foreign)
production, and whether it reflects domestic (or foreign) income. “Not
counted in any category” is also an option.
a. wages paid by your local supermarket to its employees
b. profits received by a U.S. electronics firm from its factory in Mexico
c. business spending to replace worn-out equipment
d. wages paid by a U.S. electronics firm to the employees of its factory in
e. profits received by a Japanese automaker from its factory in the United
• ANSWER: (Textbook: p. 107)
a. national income, b. net income payments from the rest of the world,
this is foreign production but domestic income c. depreciation d. not
counted in any category (note that it reflects both foreign production and
foreign income, so it is counted in neither GDP nor NI) e. net income
payments from the rest of the world (negatively)—it is domestic
production but foreign income
Chapter 5: E-3 (Page: 121)
Chapter 5: E-4 (Page: 121)
• In which line (or lines) of Table 5.3 (the spending approach) would the
value of each of the following be counted? “Not counted in any category”
is also an option.
a. a new refrigerator bought by a family
b. a book newly produced in Indiana and bought by a store in Mexico
c. new computers, manufactured in Asia, bought by a U.S. accounting
d. meals produced and served in Virginia to military personnel
e. new computers, produced in the U.S., bought by a U.S. computer retail
chain and not yet sold by the end of the year
f. a 3-year old couch bought by a used furniture store in Arizona
g. cleaning services bought by a nonprofit hospital in New York
h. the services of volunteers in an environmental action campaign
• ANSWER: (Textbook: p. 105)
a. durable goods. b. exports c. fixed investment (added) and imports
(subtracted) d. national defense e. change in private inventories f. not
counted in any category (not “newly produced”) g. services h. not counted
in any category (since unpaid)
Chapter 5: E-4 (Page: 121)
Chapter 5: E-6 (Page: 122)*
• Suppose an extremely simple economy produces only two
goods, pillows and rugs. In the first year, 50 pillows are
produced, and sold at $5 each; 11 rugs are produced, and
sold at $50 each. In the second year, 56 pillows are
produced, and sold for $5 each; 12 rugs are produced, and
sold at $60 each.
a. What is nominal GDP in each of the two years?
b. What is the growth rate of nominal GDP?
c. What is real GDP in each year, expressed in terms of
constant Year 1 dollars?
d. What is the growth rate of real GDP (in constant Year 1
• ANSWER: (Textbook: p. 108-109-110-111)
a. Year 1: $800. Year 2: $1000. b. 25%. c. Year 1: $800. Year
2: $880. d. 10%. (See spreadsheet table next page)
Chapter 5: E-6 (Page: 122)*
Chapter 5: E-10 (Page: 122) – Self Study
• Go to the Turkish Statistical Institute Web site
( What are the latest
figures for real GDP, current dollar GDP, and
the growth rate of GDP? What time period do
these represent? In what sort of dollars is real
GDP expressed?
• ANSWER: → National Accounts
Chapter 6: E-6 (Page: 147)
• Describe in a short paragraph why measures of output do
not always measure well-being. Include some specific
examples beyond those given in the text.
• ANSWER: (Textbook: p. 140-141)
Some products reduce well-being, tobacco being a specific
additional example. Some outputs reflect defensive
expenditures. Increased buying of sump pumps to
counteract flooding would be an additional example.
Measures of output do not account for the loss of leisure.
Standard measures of output do not count education or
community building activities as investments; time spent
in these activities are seen as time not spent on
“productive” activities. Some methods of production
reduce well-being. Measures of output alone do not
reflect the distribution of incomes. Students may think of
more examples, as well as more entire categories.
Chapter 6: E-7 (Page: 147)
• In calculation of the Genuine Progress Indicator,
a. Which factors are subtracted off, compared to Personal
Consumption Expenditures, because they represent bad things?
b. Which factors are not included in GPI, even though they are
included in GDP, because they are defensive expenditures or
because of differences in accounting methods?
• ANSWER: (Textbook: p. 141-142-143)
a. Bad things subtracted from Personal Consumption Expenditures
in the GPI: social costs such as the cost of crime and environmental
costs include carbon dioxide emissions damage. Adjustments for
income inequality and net foreign borrowing also reduce the GPI.
b. Defensive expenditures: all government spending except for
services of highways and streets, are not included. Differences in
accounting methods: (business) investment, consumer durables.
Chapter 6: E-7 (Page: 147)
Chapter 6: E-10 (Page: 148) – Self Study
• The UNDP’s Human Development Index, as well as a variety of
other indicators of well-being, is published in its Human
Development Report, which is available through its Web site
( Consult this report, and choose a country that is
not included in Table 6.3. Write a paragraph describing this
country’s performance on the HDI, as well as on four or five other
indicators reported in the tables (such as inequality, HIV rates, or
For example, in the 2007/2008 Human Development Report (online at, in the
tables for “Human Development Indicators” (at,
Table 1 contains information on the HDI displayed as, for example:
Chapter 6: E-10 (Page: 148) – Self Study
Other tables look at such factors as infant mortality and access to safe water. The
notation “MDG” refers to the Millennium Development Goals (see Chapter 15 of
this textbook.)
Students should be encouraged to look at the footnotes—and, if necessary, the
text of the Report—to understand what these figures represent.
Turkey (2010)
(Country profile of human development indicators)
Life expectancy at
birth (year): 72.2
Mean years of
schooling (of adults)
(years): 6.5
GDP Per Capita
(2008 PPP US$):
HDI Rank: 83
to be continued…

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