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2Chapter-Mankiw - CHAPTER 2 The Data of Macroeconomics...

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Questions for Review 1. GDP measures both the total income of everyone in the economy and the total expendi- ture on the economy’s output of goods and services. GDP can measure two things at once because both are really the same thing: for an economy as a whole, income must equal expenditure. As the circular flow diagram in the text illustrates, these are alter- native, equivalent ways of measuring the flow of dollars in the economy. 2. The consumer price index measures the overall level of prices in the economy. It tells us the price of a fixed basket of goods relative to the price of the same basket in the base year. 3. The Bureau of Labor Statistics classifies each person into one of the following three cat- egories: employed, unemployed, or not in the labor force. The unemployment rate, which is the percentage of the labor force that is unemployed, is computed as follows: Unemployment Rate = . Note that the labor force is the number of people employed plus the number of people unemployed. 4. Okun’s law refers to the negative relationship that exists between unemployment and real GDP. Employed workers help produce goods and services whereas unemployed workers do not. Increases in the unemployment rate are therefore associated with decreases in real GDP. Okun’s law can be summarized by the equation: % Real GDP = 3% – 2 × ( Unemployment Rate). That is, if unemployment does not change, the growth rate of real GDP is 3 percent. For every percentage-point change in unemployment (for example, a fall from 6 percent to 5 percent, or an increase from 6 percent to 7 percent), output changes by 2 percent in the opposite direction. Problems and Applications 1. A large number of economic statistics are released regularly. These include the follow- ing: Gross Domestic Product—the market value of all final goods and services produced in a year. The Unemployment Rate—the percentage of the civilian labor force who do not have a job. Corporate Profits—the accounting profits remaining after taxes of all manufacturing corporations. It gives an indication of the general financial health of the corporate sec- tor. The Consumer Price Index (CPI)—a measure of the average price that consumers pay for the goods they buy; changes in the CPI are a measure of inflation. The Trade Balance—the difference between the value of goods exported abroad and the value of goods imported from abroad. 5 Number of Unemployed × 100 Labor Force C H A P T E R 2 The Data of Macroeconomics
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2. Value added by each person is the value of the good produced minus the amount the person paid for the materials necessary to make the good. Therefore, the value added by the farmer is $1.00 ($1 – 0 = $1). The value added by the miller is $2: she sells the flour to the baker for $3 but paid $1 for the flour. The value added by the baker is $3: she sells the bread to the engineer for $6 but paid the miller $3 for the flour. GDP is the total value added, or $1 + $2 + $3 = $6. Note that GDP equals the value of the final good (the bread).
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