TUTORIAL QUESTIONS AND ANSWERS FOR CHAPTER 2: GROSS DOMESTIC PRODUCT
1.
Classify each of the following items as a final good or service or an
intermediate good or service and identify which is a component of
consumption expenditure, investment, or government expenditure on goods
and services:
 Airline ticket bought by a student.
Airline tickets are intermediate goods that are used for the final service, airline
flights. They are part of consumption expenditure.

New airplanes bought by Southwest Airlines.
New airlines purchased by Southwest Airlines are a final good. They are part of
investment.

Cheese bought by Domino’s.

The purchase of a new iPhone for the vice president.
Cheese bought by Domino’s is an intermediate good.

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This purchase is a final good. It is part of government expenditure on goods and
services.
New house bought by Bill Gates.
A new house purchased by Bill Gates is a final good. It is part of investment.
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Use the following figure, which illustrates the circular flow model, to work Problems
3 and 4.
3.




During 2008, in an economy
Flow B was $9 trillion,
Flow C was $2 trillion,
Flow D was $3 trillion, and
Flow E was –$0.7 trillion.
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Name the flows and calculate the value of
Flow A is aggregate income; Flow B is consumption expenditure; Flow C is
government expenditure; Flow D is investment; Flow E is net exports.
a. Aggregate income.
Aggregate income is $13.3 trillion. Aggregate income equals aggregate
expenditure, which is the sum of consumption expenditure (Flow B), investment
(Flow D), government expenditure (Flow C), and net exports (Flow E). Therefore
aggregate expenditure equals $9 billion plus $3 billion plus $2 billion plus $0.7
trillion, which is $13.3 trillion. Therefore aggregate income also equals $13.3
trillion.
b. GDP.
GDP is $13.3 trillion. GDP equals aggregate income, which from part a is $13.3
trillion.
During 2009, flow A was $13.0 trillion, flow B was $9.1 trillion, flow D was $3.3
trillion, and flow E was –$0.8 trillion. Calculate the 2009 values of
a. GDP.
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4.
GDP is $13.0 trillion. GDP equals aggregate income. Flow A is aggregate income, so
aggregate income—and hence GDP—is $13.0 trillion,
b. Government expenditure.
Government expenditure is $1.4 trillion. Aggregate expenditure equals GDP, which
from part (a) is $13.0 trillion. Aggregate expenditure is the sum of consumption
expenditure (Flow B), investment (Flow D), government expenditure (Flow C), and
net exports (Flow E). Therefore government expenditure equals aggregate
expenditure minus consumption expenditure minus investment minus net exports.
Government expenditure equals $13.0 trillion minus $9.1 trillion minus $3.3 trillion
minus $0.8 trillion, which is $1.4 trillion.
5.





Use the following data to calculate aggregate expenditure and imports of
goods and services.
Government expenditure: $20 billion
Aggregate income: $100 billion
Consumption expenditure: $67 billion
Investment: $21 billion
Exports of goods and services: $30 billion
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Aggregate expenditure equals aggregate income, so aggregate expenditure equals
$100 billion. Aggregate expenditure also equals consumption expenditure plus
investment plus government expenditures on goods and services plus exports of
goods and services minus imports of goods and services , so imports of goods and
services equals consumption expenditure plus investment plus government
expenditure on goods and services plus exports minus aggregate expenditure.
Using this formula gives imports of goods and services equals $67 billion + $21
billion + $20 billion + $30 billion −
$100 billion, which is $38 billion.
Item
Billions of
Wages paid to labor
Consumption
expenditure
Net operating surplus
Investment
Government
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expenditure
Net exports
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Depreciation
Use the following data to work Problems
8 and 9.
The table lists some macroeconomic
dollars
8,000
10,000
3,200
2,000
2,800
−700
1,800
data for the United States in 2008.
8.
Calculate U.S. GDP in 2008.
GDP equals consumption expenditure plus investment plus government
expenditure plus net exports, so GDP equals $10,000 billion + $2,000 billion +
$2,800 billion − $700 billion, or $14,100 billion.
9.
Explain the approach (expenditure or income) that you used to calculate GDP.
The expenditure approach was used.
10.
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Use the following data to work Problems 10 and 11.
The national accounts of Parchment Paradise are kept on (you guessed it)
parchment. A fire destroys the statistics office. The accounts are now incomplete
but they contain the following data:
 GDP (income approach): $2,900
 Consumption expenditure: $2,000
 Indirect taxes less subsidies: $100
 Net operating surplus: $500
 Investment: $800
 Government expenditure: $400
 Wages: $2,000
 Net exports: –$200
Calculate GDP (expenditure approach) and depreciation.
For the expenditure approach, GDP equals the sum of consumption expenditure,
investment, government expenditure on goods and services, and net exports.
Fortunately, these data were saved from the fire. Hence GDP = C + I + G + X − M
= $2,000 + $800 + $400  $200 = $3,000.
From the income approach, GDP equals wages plus net operating surplus 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, net operating surplus,
indirect taxes less subsidies equals $2,000 + $500 + $100 = $2,600. So
depreciation equals $2,900  $2,600 = $300.
11.
Calculate net domestic income at factor cost and the statistical discrepancy.
Th
Net domestic product at factor cost equals the sum of wages and net operating
surplus. 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.
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Use the following data to work Problems 29 to 31.
An economy produces only apples
Quantities
and oranges. The base year is
Apples
2012, and the table gives the
Oranges
quantities produced and the
prices.
Prices
Apples
Oranges
2012
60
80
2013
160
220
2012
$0.50
$0.25
2013
$1.00
$2.00
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29.
Calculate nominal GDP in 2012 and 2013.
In 2012 nominal GDP is $50 and in 2013 nominal GDP is $600. Nominal GDP in
2012 is equal to total value of the goods and services produced in 2012. The value
of apples is 60 apples at $0.50 each, which is $30, and the value of oranges is 80
oranges at $0.25 each, which is $20. The total value is $50 so nominal GDP in 2012
is $50.
Nominal GDP in 2013 is equal to total value of the goods and services produced in
2013. The value of apples is 160 apples at $1.00 each, which is $160 and the value
of oranges is 220 oranges at $2.00 each, which is $440. The total value is $600 so
nominal GDP in 2013 is $600.
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30. Calculate real GDP in 2012 and 2013 expressed in base-year prices.
Real GDP in 2012 is $50 and in 2013 is $135. Real GDP in the base year, 2012, is equal to nominal GDP.
Real GDP in 2013 using base-year prices is equal to the quantities produced in 2013 valued at base-year,
2012, prices. Real GDP in 2013 is 160 apples at $0.50 each, which is $80, and the value of oranges is 220
oranges at $0.25 each, which is $55. The total value of 2013 production using 2012 prices is $135, so real
GDP in 2013 is $135
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