Chapter 10
GROSS DOMESTIC PRODUCT AND ECONOMIC GROWTH
Chapter in a Nutshell
1. Economists have developed a single statistic to measure the output of an economy. This
statistic is known as gross domestic product, or GDP. GDP is the market value of all final
goods and services produced within a country in a given year.
2. The GDP of an economy can be calculated by adding the expenditures on goods and services
produced during the current year. When derived by the expenditure approach, there are four
components of GDP: (1) personal consumption expenditures, (2) gross private domestic
investment, (3) government purchases of goods and services, and (4) net exports to foreigners.
For the United States, personal consumption expenditures have been the largest component of
GDP, typically accounting for two-thirds or more of GDP.
3. Although GDP is our best single measure of the value of the output produced by an economy,
it is not a perfect measure of economic well being. For example, GDP ignores transactions
that do not take place in organized markets. GDP also ignores the underground economy as
well as changes in the environment that arise through the production of output. Furthermore,
GDP does not account for leisure nor does it show how much output is available per person.
Finally, GDP does not reflect the quality and kinds of goods that compose a nation=s output.
4. Nominal GDP, or current-dollar GDP, is expressed in terms of the prices existing in the year
in which goods and services were produced. Real GDP, or constant-dollar GDP, is nominal
GDP adjusted to eliminate changes in prices. It measures actual (real) production and shows
how actual production, rather than prices of what is produced, has changed. Real GDP is
superior to nominal GDP for assessing rates of economic growth.
5. An economy realizes economic growth when it increases its full production level of output
over time. The rate of economic growth is the percentage change in the level of economic
activity from one year to the next. Typically, analysts look at the rate of growth in an
economy=s real GDP.
6. The keys to long-run economic growth are the incentives that induce individuals to work and
firms to invest in production technology, within the limits imposed by demographics and the
rate of technological advances. Among the major determinants of economic growth are
natural resources, physical capital, human capital, and economic efficiency. Government may
enact policies that foster economic growth, such as: (1) boosting productivity by increasing
domestic saving, (2) stimulating research and development, (3) working to reduce trade
barriers, and (4) improving the efficiency of regulation. Governments may also target and
subsidize specific industries that might be especially important for technological progress.
Such a policy is known as industrial policy.
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Chapter 10: Gross Domestic Product and Economic Growth
99
7. Although economic growth may provide benefits for a nation, it can also entail costs. Critics
maintain that additional economic growth can promote more pollution, more crowded cities,
excessive emphasis on materialism, and psychological problems that result in suicide and drug
usage. Economic growth may also result in a depletion of scarce resources, eventually
resulting in a decline in the nation=s standard of living. However, proponents argue that
economic growth does not cause these problems, but rather fosters higher real income, less
poverty, and greater economic security.
8. For decades, the economies of East Asia have been characterized by relatively high rates of
economic growth. High rates of investment and increasing endowments of capital due to
universal education have underlain such growth. Moreover, East Asia has relied on industrial
policies to support selected industries such as steel, shipbuilding, coal, power, and fertilizer.
The East Asian economies have followed a “flying geese” pattern of economic growth in
which countries gradually move up in technological development by following in the pattern
of countries ahead of them in the development process.
Chapter Objectives
After reading this chapter, you should be able to:
1. Discuss the nature of gross domestic product and how it is calculated.
2. Distinguish between nominal gross domestic product and real gross domestic product.
3. Describe the factors that underlie a nation=s rate of economic growth in the long run.
4. Identify the possible reasons for the slowdown in U.S. productivity
5. Discuss the possible policies that government might enact to speed up economic growth.
6. Analyze the economic growth policies of East Asia.
Knowledge Check
Key Concept Quiz
1. gross domestic product
(GDP)
_____ a. market value of all final goods and services
produced within a country in a given year
2. expenditure approach
_____ b. consists of all private-sector investment
3. gross private domestic
investment
_____ c. measured as exports – imports
4. net exports
5. nominal GDP
6. real GDP
7. price index
8. GDP deflator
9. rate of economic growth
_____ d. constant-dollar GDP
_____ e. the broadest price index
_____ f. exclusive rights to a distinguishing name or
symbol
_____ g. a pattern of development used to describe East
Asia
_____ h. a method of measuring the GDP of an economy
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Chapter 10: Gross Domestic Product and Economic Growth
10. industrial policy
_____ i. current-dollar GDP
11. trademarks
_____ j. is used to adjust GDP to reflect changes in actual
output
12. flying geese pattern of
economic growth
_____ k. the percentage change in the level of economic
activity from one year to the next
_____ l. involves targeting and subsidizing specific
industries
Multiple Choice Questions
1. Gross domestic product (GDP)
a.
b.
c.
d.
is a measure of the value of final goods and services
uses market prices
measures the value of domestic output
all of the above
2. GDP includes
a.
b.
c.
d.
government purchases of goods and services and transfer payments
only government transfer payments
government purchases of goods and services but not transfer payments
none of the above
3. Net exports equals
a.
b.
c.
d.
exports – depreciation of exports
exports + imports
exports – imports
exports + net investment
4. A decrease in business inventories during the year
a.
b.
c.
d.
is counted as negative investment
is not considered as being part of investment
leads to a decline in the growth rate
implies that the economy is in a recession
5. When net exports are positive,
a.
b.
c.
d.
exports exceed imports
imports exceed exports
the economy must enjoy high rates of growth
the stock market reaches new peaks
6. Changes in nominal GDP may be caused by
a.
b.
c.
d.
a change in prices only
a change in output only
a change in output and prices
all of the above
Chapter 10: Gross Domestic Product and Economic Growth
7. Real GDP is
a.
b.
c.
d.
a more accurate measure of national output than nominal GDP
measured in base-year prices
constant-dollar GDP
all of the above
8. The GDP deflator
a.
b.
c.
d.
is a price index
includes only consumer goods and services
is used to measure the output of the underground economy
all of the above
9. Economic growth
a.
b.
c.
d.
is a long-run objective of the United States
can be described by using a production possibilities model
may be best described as a rise in full production output per person over time
all of the above
10. All of the following are determinants of economic growth except
a.
b.
c.
d.
natural resources
physical and human capital
the amount of financial capital of a nation
economic efficiency
11. All of the following may be policy prescriptions for enhancing growth, except
a.
b.
c.
d.
improving the skills of the work force
stimulating research and development
protecting domestic markets by creating new trade barriers
improving regulatory efficiency
12. Joseph Schumpeter
a.
b.
c.
d.
coined the term “creative destruction”
considered monopoly profits as healthy
disagreed with Adam Smith’s idea about the effect of monopolies
all of the above
13. Technology may impact prices in all of these ways, except
a.
b.
c.
d.
reduction of direct costs
electronic commerce
reduction in risk to investors
declining long-run average costs
14. For the United States, which is the largest component of expenditures in GDP accounts?
a.
b.
c.
d.
government purchases of goods and services
gross private domestic investment
personal consumption expenditures
net exports of goods and services
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Chapter 10: Gross Domestic Product and Economic Growth
15. Proponents of _____ maintain that government should enact policies that encourage the
development of emerging, Asunrise@ industries such as high-technology
a.
b.
c.
d.
macroeconomic policy
microeconomic policy
industrial policy
supply-side policy
16. In the calculation of GDP, which of the following is included as a personal consumption
expenditure?
a.
b.
c.
d.
the purchase of a used automobile
the purchase of a new computer required for an accountants job
the purchase of a new house by a college professor
the purchase of a new CD player by a college student
17. All of the following are examples of investment in the expenditures approach to calculating
GDP except
a.
b.
c.
d.
Ford builds an auto assembly plant
Ford buys new robots to produce autos
Ford adds 1,000 new autos to inventories
Ford purchases $2 million of U.S. government securities
18. GDP tends to underestimate the value of the total output of the economy because of the
existence of
a.
b.
c.
d.
the production of final goods
the underground economy
unemployment compensation benefits
industrial pollution
19. If U.S. exports equal $800 billion and U.S. imports equal $900 billion, the United States
a.
b.
c.
d.
has a surplus in its net exports equal to $1,700 billion
has a surplus in its net exports equal to $100 billion
has a deficit in its net exports equal to $1,700 billion
has a deficit in its net exports equal to $100 billion
20. According to the expenditures approach, the largest component on GDP is
a.
b.
c.
d.
gross private domestic investment
personal consumption expenditures
government purchases of goods and services
net exports of goods and services
21. Assume that GDP equals $9,000 billion, gross private domestic investment equals $1,200
billion, personal consumption expenditures equals $5,400 billion, and government purchases
of goods and services equals $2,000 billion. We can say
a.
b.
c.
d.
exports exceed imports by $400 billion
exports exceed imports by $800 billion
imports exceed exports by $400 billion
imports exceed exports by $800 billion
Chapter 10: Gross Domestic Product and Economic Growth
103
22. In 2000, the nominal GDP of the United States equaled $9,824.6 billion and the GDP deflator
equaled 106.9 The real GDP of the United States in 2000 equaled
a.
b.
c.
d.
$10,286.2 billion
$9,936.7 billion
$9,431.9 billion
$9,190.4 billion
23. The real GDP of the United States equaled $8,159.5 in 1996 and $8,508.9 in 1998. Over this
period, real GDP grew about
a.
b.
c.
d.
2.3 percent
3.1 percent
4.3 percent
5.2 percent
24. Suppose that you knew that real GDP grows at a constant rate of 4.2 percent a year. It would
take about ________for the real GDP to double
a.
b.
c.
d.
12 years
15 years
17 years
20 years
True-False Questions
1.
T
F
GDP is not a single measure, but a combination of several measures of a
nation’s well-being.
2.
T
F
Economists typically measure the change in a country’s nominal GDP
over time.
3.
T
F
Nominal GDP is measured using current-year prices.
4.
T
F
Real GDP is a better measure of an economy’s output than nominal
GDP.
5.
T
F
Increasing domestic saving and reducing consumption tend to reduce
economic growth.
6.
T
F
When an economy experiences growth in nominal GDP, one can be
certain that the production possibility frontier has shifted outward.
7.
T
F
The GDP deflator uses prices of all consumer and investment goods.
8.
T
F
Net exports increase when imports decrease and exports increase.
9.
T
F
Gross domestic investment includes changes in business inventories.
10.
T
F
The GDP reflects the distribution of income in an economy.
11.
T
F
The GDP includes all transactions, even if they do not occur in organized
markets.
12.
T
F
The expenditures approach to GDP measurement does not permit the
inclusion of changes in inventories.
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Chapter 10: Gross Domestic Product and Economic Growth
13.
T
F
Both invention and innovation can lead to economic efficiency.
14.
T
F
The United States may have experienced some productivity slowdown
due to declining R&D expenditures in the late 1970s.
15.
T
F
In the U.S., none of the factors have been reversed that caused the
productivity growth slowdown of the 1970s and 1980s.
16.
T
F
Economists argue that easing of trade protection may lead to faster
growth.
17.
T
F
An open trading system that exposes businesses to greater competition
tends to destroy efficient domestic industries.
18.
T
F
Some economists consider industrial policy to be especially important
for technological progress.
19
T
F
According to Joseph Schumpeter, the drive to capture monopoly profits
promotes a creative destruction as old goods and livelihoods are replaced
by new ones.
20.
T
F
According to the economic growth theory of Adam Smith, the model of
monopoly is the main spur to economic efficiency.
21.
T
F
Critics of economic growth maintain that it tends to result in more
pollution, more crowded cities, and excessive emphasis on materialism.
22.
T
F
The keys to long-run economic growth are the incentives that induce
individuals to work and firms to invest in production technology, within
the limits imposed by demographics and the rate of technological
advance.
23.
T
F
The U.S. government has claimed that production subsidies give Airbus
an unfair competitive advantage against Boeing in the commercial
jetliner industry.
24.
T
F
If the U.S. economy grows by 3 percent per year, it will take about 12
years for the economy=s output to double.
Chapter 10: Gross Domestic Product and Economic Growth
105
Application Questions
1. Use the table below to answer the following questions
Consumption expenditures......................... $200 billion
Government purchases ................................. $60 billion
Taxes ............................................................ $30 billion
Investment ................................................... $50 billion
Social Security payments ............................. $20 billion
Imports ......................................................... $20 billion
Exports ......................................................... $10 billion
a. How much is GDP?
b. How much are net exports?
c. Social Security payments are government expenses. Should they be included in GDP?
2. Use the table below to answer the following questions.
Year
Nominal
GDP
(billions of
dollars)
1998
2000
4.836
Real GDP
(billions of
1992 dollars)
GDP
Deflator
3.000
1.500
3.100
a. What is the nominal GDP in 1998?
b. What is the GDP deflator in 2000?
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Chapter 10: Gross Domestic Product and Economic Growth
3. Use the table below to answer the following questions.
Year
Nominal
GDP
(billions of
dollars)
1992
6244.4
6244.4
1993
6553.0
6386.4
1994
6935.7
6698.7
Real GDP
(billions of
1992 dollars)
GDP
Deflator
102.6
a. What is the base year?
b. What is the rate of growth in real GDP between 1992 and 1993?
c. Did real GDP grow faster between 1993 and 1994 than between 1992 and 1993?
d. What happened to the GDP deflator between 1993 and 1994?
Answers to Knowledge Check Questions
Key Concept Answers
1. a
4. c
2. h
5. i
3. b
6. d
7. j
8. e
9. k
10.
11.
12.
Multiple Choice Answers
1. d
6. d
2. c
7. d
3. c
8. a
4. a
9. d
5. a
10. c
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
True-False Answers
1. F
6. F
11. F
c
d
c
c
c
l
f
g
d
d
b
d
b
16. T
21.
22.
23.
24.
a
d
c
c
21. T
Chapter 10: Gross Domestic Product and Economic Growth
2.
3.
4.
5.
F
T
T
F
7.
8.
9.
10.
F
T
T
F
12.
13.
14.
15.
F
T
T
F
17.
18.
19.
20.
F
T
T
F
107
22. T
23. T
24. F
Application Question Answers
1. a. $300 billion
b. -$10 billion
c. No. Social Security payments should not be included, since they are transfer payments.
These payments do not represent newly produced goods.
2. a. Nominal GDP in 1998 is $4.500 billion.
b. The GDP deflator in year 2000 is 156.
3. a. The base year is 1992.
b. The rate of growth between 1992 and 1993 is (6386.4 – 6244.4) ÷ 6244.4 = 0.022.
c. The rate of growth between 1993 and 1994 is (6698.7 – 6386.4) ÷ 6386.4 = 0.048.
Yes, the rate of growth more than doubled.
d. The GDP deflator in 1994 is 103.5; therefore, the GDP deflator increased between 1993
and 1994.