Questions for Review ( Chapter 23)

Q. A farmer grows a bushel of wheat and sells it to a miller for $1.00. The miller turns the wheat
into flour and then sells the flour to a baker for $3.00. The baker uses the flour to make bread and
sells the bread to an engineer for $6.00. The engineer eats the bread. What is the value added by
each person? What is GDP?
The value added by each person:
A Farmer: $1 - $0 = $1
A Miller: $3 - $1 = $2
A Baker: $6 - $3 = $3
GDP = final product cost = amount of value added = $6
Q. Suppose a woman marries her butler. After they are married, her husband continues to wait on
her as before, and she continues to support him as before (but as husband rather than as an
employee).
a) How does the marriage affect GDP?
b) How Should it affect GDP?
a) The marriage affects GDP:
Before the woman marries her butler, the butler still receives an income from providing a service
for woman. This income comes from the woman’s expenditure of the butler’s service. The
service is valued at current market prices for “butler’s service”. => So, this service is counted
towards the GDP.
After the marriage, the service is no longer included as a part of GDP, since GDP does not
include goods and services produced and consumed by households. The reasons for this are:
(1) The butler continues to wait on the woman as her husband but not an employee
(Although no change in the quality and quantity of the service rendered)
=> the money being exchanged for his work is removed from the economy.
(2) The woman continues to support the butler as before =>But as his wife
=> Nominally, the part supported of the butler comes from his wife’s estate but not the woman’s
expenditure as before. => He is entitled for this since they are legal husband and wife. => His
salary is gone.
(1), (2) => There is no exchange in the market.
=> The amount of money being exchanged for goods or services within the nation drops.
=> GDP will decrease so slightly.
b) It should affect:
There is no chance in the quality and quantity of the service rendered.
 GDP should have no chance since the butler as a husband still waits on for the woman
and she receive the service as before => no chance in the quality and quantity rendered
=> the butler should receive a income as the woman’s expenditure from this service.

Q. Place each of the following transactions in one of the four components of expenditure:
consumption, investment, government purchases, and net exports.
1. Apple sells a computer to a government school in Paris, Kentucky.
 Government purchase
2. Apple sells a computer to an accounting firm in Paris, Illinois.
 Investment
3. Apple sells a computer to a bakery in Paris, France.
 Net exports
4. Apple sells a computer to Paris Hilton.
 Consumption
5. Apple builds a computer to be sold next year.
 Invesment (inventory)

Q. Consider an economy that produces and consumes hot dogs and hamburgers. In the following
table are data for two different years: 

i) Using 2010 as the base year, compute the following statistics for each year: nominal
GDP, real GDP, the implicit price deflator for GDP. 

Nominal GDP Real GDP GDP deflactor

2010 $1000 $1000 100
2015 $3000 $2000 150