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1Chapter 19 Answers to End-of-Chapter Problems and Applications 2. We would prefer working in an industry producing a normal good during an economic expansion, but an industry producing an inferior good during a recession. During an expansion, the increase in incomes would increase the demand for a normal good, which would increase the demand for jobs in the industry. The expansion, however, would decrease the demand for an inferior good and the jobs that produce them. During a recession, the decrease in incomes would decrease the demand for a normal good, which would decrease the demand for jobs in the industry, but would increase the demand an inferior good and the jobs that produce them. 4. b., c., and d. -- the purchase of the aircraft carrier by the federal government, the French wine by a U.S. consumer, and the new machine tool by Ford – represent purchases of final goods. The purchase of wheat from a wheat farmer by a bakery represents the purchase of an intermediate good. 6. The value of the house built in 2000 would not be included in GDP of 2006 because the sale does not represent new production. The value of the services of the real estate agent that helped sell or buy the house in 2006 would be included in GDP of 2006 because those services were newly provided in 2006. 8. a. Real GDP for 2006 = (100 x $50) + (100 x $2) + (50 x $30) = $6,700 Real GDP for 2007 = (100 x $50) + (120 x $2) + (65 x $30) = $7,190 b. 700,6$700,6$190,7$−x 100 = 7.3%
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210. Value added subtracts only the cost of intermediate goods, but profits subtracts all costs – the costs of intermediate goods along with the costs of the so-called primary factors of production (labor, capital, natural resources, and entrepreneurship). 12. Value added of the artist = ($800 x 10) - $5,000 = $3,000 Value added of the local art store = ($1,000 x 10) – ($800 x 10) = $2,000 14. a. is likely to increase measured GDP, and c. is likely to reduce it. b. is also likely to increase measured GDP if it results in increased government expenditures on law enforcement and increased private expenditures on security. But an increase in the crime rate might indicate that the level of production in the underground economy is increasing, which should reduce measured GDP, not increase it. 16. “Informal economic activities” refer to the underground economy. These activities are concealed and will not be counted in GDP. They make the comparison of standard of living across countries harder, because economists often use real GDP per capita as a general measure of standard of living. 18. a. Nominal GDP is greater than real GDP. b. Nominal GDP equals real GDP. c. Nominal GDP is less than real GDP. 20. Nominal GDP Real GDP GDP deflator2000 $9,817 $9,817 100.0 2001 10,128 9,890 102.4 2002 10,470 10,049 104.2 2003 10,971 10,321 106.3 2004 11,734 10,756 109.1