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© 2013 Pearson
GDP: A Measure of Total
Production and Income
21
CHECKPOINTS
© 2013 Pearson
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Checkpoint 21.1
Checkpoint 21.2
Checkpoint 21.3
Problem 1
Problem 1
Problem 1
Problem 2
Problem 2
Problem 2
In the News
Problem 3
In the news
Problem 4
In the News
© 2013 Pearson
CHECKPOINT 21.1
Practice Problem 1
Classify each of the following items as a final good or an
intermediate good and identify which is a component of
consumption expenditure, investment, or government
expenditure on goods and services.
• Banking services bought by a student.
• New cars bought by Hertz, the car rental firm
• Newsprint bought by USA Today from International Paper.
• The purchase of a new aircraft for the Vice-president
• New house bought by Beyoncé
© 2013 Pearson
CHECKPOINT 21.1
Solution
The student’s banking service is a final service and part of
consumption expenditure.
Hertz’s new cars are additions to capital, so they are part of
investment and final goods.
Newsprint is a component of the newspaper, so it is an
immediate good.
The purchase of a new aircraft for the Vice-president is a final
good and is part of government expenditure.
The new house is a final good and part of investment.
© 2013 Pearson
CHECKPOINT 21.1
Practice Problem 2
The figure shows the flows of
expenditure and income on
Lotus Island.
In 2008:
R was $10 billion
W was $30 billion
U was $12 billion
X was $15 billion
Z was $3 billion.
Calculate total expenditure
and total income.
© 2013 Pearson
CHECKPOINT 21.1
Solution
Total expenditure is the
sum of red flows: C, I, G,
and NX.
On the figure:
C is the flow W
I is the flow X
G is the flow U
NX is the flow Z
© 2013 Pearson
CHECKPOINT 21.1
So total expenditure equals
W + X + U + Z.
Total expenditure equals
$(30 + 15 + 12+ 3) billion,
which is $60 billion.
Total income is the blue
flow, Q.
But total income equals
total expenditure, so total
income is $60 billion.
© 2013 Pearson
CHECKPOINT 21.1
In the News
U.S. economy grew slower in spring than previously
reported
Real GDP increased at an annual rate of 1.0 percent in the
second quarter of 2011. Investment, exports, consumption
expenditure, and government expenditure increased faster
than 1.0 percent.
Source: BEA News Release, August 26, 2011
Use the letters on the circular flow figure to indicate the
flows in which the items in the news clip occur.
How can GDP have increased by 1.0 percent if the other
items in the news clip increased faster than 1.0 percent?
© 2013 Pearson
CHECKPOINT 21.1
Solution
GDP is the sum of flows W,
X, U, and Z.
Investment is X,
Consumption expenditure is
W,
Government expenditure is U,
and
Exports are part of Z.
© 2013 Pearson
CHECKPOINT 21.1
GDP = C + I + G + X – M,
so if C + I + G + X grew
faster than 1 percent,
then M must have grown
faster than C + I + G + X.
© 2013 Pearson
CHECKPOINT 21.2
Practice Problem 1
The table shows some of the
items in the U.S. National
Income and Product Accounts
in 2008.
Use the expenditure
approach to calculate U.S.
GDP in 2008.
© 2013 Pearson
CHECKPOINT 21.2
Solution
The expenditure approach
sums the expenditure on final
goods and services.
That is, GDP = C + I + G + NX.
In 2008:
GDP = ($10.0 + $2.1 + $2.9 
$0.7) trillion
GDP was $14.3 trillion.
© 2013 Pearson
CHECKPOINT 21.2
Practice Problem 2
The table shows some of the
items in the U.S. National
Income and Product accounts
in 2008.
What was U.S. GDP as
measured by the income
approach in 2008?
By how much did gross product
and net product differ in 2008?
© 2013 Pearson
CHECKPOINT 21.2
Solution
GDP as measured by the
income approach equals GDP
as measured by the
expenditure approach plus the
statistical discrepancy.
The statistical discrepancy is
zero, so U.S. GDP as
measured by the income
approach was $14.3 trillion.
© 2013 Pearson
CHECKPOINT 21.2
Gross product minus net product
equals depreciation, which was
$1.9 trillion in 2008.
© 2013 Pearson
CHECKPOINT 21.2
Practice Problem 3
The table shows some of the
items in the U.S. National
Income and Product Accounts
in 2008.
Calculate U.S. GNP and U.S.
national income in 2008.
© 2013 Pearson
CHECKPOINT 21.2
Solution
GNP = GDP + Net factor
income from abroad.
In 2008,
GNP = $(14.3 + 0.2) trillion,
which was $14.5 trillion.
© 2013 Pearson
CHECKPOINT 21.2
National income equals
GNP  Depreciation 
Statistical discrepancy.
The statistical discrepancy is
zero, so in 2008,
National income equals
$(14.5  $1.9) trillion, which is
$12.6 trillion.
© 2013 Pearson
CHECKPOINT 21.2
Practice Problem 4
The table shows some
data for an economy.
If the base year is 2010,
calculate the economy’s
nominal GDP and real
GDP in 2011.
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CHECKPOINT 21.3
Solution
Nominal GDP in 2011 at
2008 prices equals
(160 apples x $1.00) +
(220 oranges x $2.00),
which equals $600.
Real GDP in 2011 at 2010
prices equals
(160 apples x $0.50) +
(220 oranges x $0.25),
which equals $135.
© 2013 Pearson
CHECKPOINT 21.2
In the news
As consumers reduce their spending, inventories are
rising
The Commerce Department reported that sales of
nondurable goods fell 0.6 percent, while sales of durable
goods decreased 1.5 percent in August. Inventories of
durable goods increased 1.4 percent.
Source: Reuters, October 9, 2008
Which component of GDP changed when (i) sales of nondurable goods fell, (ii) sales of durable goods decreased,
and (iii) inventories of durable goods increased?
Provide an example of each item of expenditure.
© 2013 Pearson
CHECKPOINT 21.2
Solution
(i) Sales of nondurable goods such as strawberries are
bought by households and are part of consumption
expenditure, C.
(ii) Sales of durable goods such as iPhones that are bought
by households are part of consumption expenditure, C, and
sales of durable goods such as tower cranes bought by
firms are part of investment, I.
(iii) An inventory of durable goods, such as the auto parts
at a Ford plant, is part of investment, I.
© 2013 Pearson
CHECKPOINT 21.3
Practice Problem 1
The United Nations Human
Development Report gives the
data for 2011 in Table 1.
Other information suggests that:
tIn Canada and the United States, household production is
similar and smaller than in China and Russia.
The underground economy is largest in Russia and China
and a similar proportion of these economies.
Canadians and Americans enjoy more leisure hours than
do the Chinese and Russians.
© 2013 Pearson
CHECKPOINT 21.3
In which pair (or pairs) of these
four countries is it easiest to
compare the standard of living?
In which pair (or pairs) of these
four countries is it most difficult to
compare the standard of living?
Why?
© 2013 Pearson
CHECKPOINT 21.3
Solution
Two pairs—Canada and the United States, and China and
Russia—are easy to compare because household
production, the underground economy, leisure hours, and
the environment are similar in the countries in each pair.
The most difficult comparison is Canada and the United
States with either China or Russia.
Household production and the underground economy
narrow the differences, but leisure hours and the
environment widen them.
© 2013 Pearson
CHECKPOINT 21.3
Practice Problem 2
The UN reported the following real GDP per person in
2002: China $4,580; Russia $8,230; Canada $29,480; and
the United States $35,750.
In Canada and the United States, household production is
similar and smaller than in China and Russia.
The underground economy is largest in Russia and China
and a similar proportion of these economies.
Canadians and Americans enjoy more leisure hours than
do the Chinese and Russians.
© 2013 Pearson
CHECKPOINT 21.3
Do the differences in real GDP per person rank the
standard of living in these four countries?
What additional information would we need to be able to
make an accurate assessment of the relative standard of
living in these four countries?
© 2013 Pearson
CHECKPOINT 21.3
Solution
Differences in real GDP per person probably correctly rank
the standard of living in these four countries because
where the gap is small (Canada and the United States),
other factors are similar, and where other factors differ, the
gaps are huge.
We would need more detailed information on the value of
household production, the underground economy, the
value of leisure, and the value of environmental
differences to make an accurate assessment of relative
living standards.
© 2013 Pearson
CHECKPOINT 21.3
Practice Problem 3
Economists look to expand GDP to include the quality
of life
Robert Kennedy, when seeking the Democratic presidential
nomination 40 years ago, remarked that GDP measures
everything except that which makes life worthwhile.
Source: The New York Times, September 1, 2008
Which items did Robert Kennedy probably think were
missing?
© 2013 Pearson
CHECKPOINT 21.3
Solution
GDP measures production that is traded in markets. GDP
does not include household production, leisure time, health
and life expectancy, political freedom, and social justice.
These items are probably the ones that Kennedy believed
were missing from GDP as a measure of the quality of life.
© 2013 Pearson