M Economics The Basics 3rd Edition

Mandel Solutions Manual

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Chapter 7
The First Step into Macroeconomics

Answers to End-of-Chapter Problems

1. The three reasons to measure the size of the economy that are specifically mentioned in
the textbook are to identify economic problems, diagnose their causes, and figure out
the right policy fixes. Students might also mention the specific example of using GDP
information to determine the economy’s ability to produce tanks and airplanes needed
for fighting a war. Measuring the happiness of people is not a reason to measure the
size of the economy.

2. a) The GDP would be the sum of the products of the quantity and price given for
each good. The dollar value of pineapples produced is 40,000,000 × $1.00 =
$40,000,000. The dollar value of commercial airplanes produced is 10 ×
$10,000,000 = $100,000,000.

Therefore, GDP is $40,000,000 + $100,000,000 = $140,000,000.

b) It does not change GDP. GDP measures the dollar value of production, and
whether these goods are sold in the U.S. or abroad (or, in fact, whether they are
sold at all) does not affect the fact that they were produced. What does change is
the category under which the spending is counted. If these goods were sold
domestically, they would show up under consumption spending (or nonresidential
investment or government spending). If they are sold abroad, they would show up
as part of net exports.

3. Goods and services are bought by their ultimate users and are counted in GDP.
Intermediate inputs include any goods and services bought by a business that are
completely used up in production in less than a year. To avoid double-counting,
intermediate inputs are not included in GDP. (See table on next page)

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 Final Good or Service Component
Transaction
or Intermediate Good of GDP
a) A restaurant purchases chopped does not
Intermediate input
meat to use in hamburgers. apply
b) A restaurant buys new chairs for its nonresidential
Final good
dining room. investment
c) A family on vacation in the United personal
Final service
States rents a car. consumption
d) The local school district pays the government
Final service
salary of a first-grade teacher. purchase

4. Gross private domestic investment includes 3 types of investment: Non residential

investment: which are expenditures by firms for machines, tools and equipment;
Residential Investment which includes expenditures by households and firms on
apartments and buildings; and the change in inventories in a given period.

a) Gross private domestic investment; the product is for business use

b) Gross private domestic investment; the product is for business use

c) Gross private domestic investment; the product is for business use

d) Personal consumption; the product is for personal use

5. GDP is the sum of personal consumption, nonresidential and residential investment,

change in private inventories, government consumption and investment, and net
exports. Keep in mind that when foreign-based companies make investments in the
U.S. (like building factories in the U.S.), it is counted in the U.S. GDP.

a) GDP would decrease. In this example, less is being produced domestically,

although spending remains the same. As far as the categories of measurement are
concerned, personal consumption would remain unchanged, but net exports would
decrease.

b) GDP would increase. The building of the Toyota plant is new nonresidential
investment. The increase in the production of cars from the new Toyota plant
cancels out the decrease in the production of cars from the Ford plant.

c) GDP would increase, because these workers would produce output.

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© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
 d) GDP would increase because of the increase in nonresidential investment. If
consumers purchase the same number of cars, but they are produced domestically
rather than overseas, this would not affect GDP. However, the construction of the
new plant is new investment, so GDP increases.

6. Government social benefits are typically used to fund personal consumption by

individuals, or perhaps residential investment. Social Security provides cash that can be
used for food and other goods, or to pay for rent or even home renovations.

7. GDP focuses primarily on the market economy—the part of the economy in which
people get paid for the work they do. However, it does not cover the nonmarket
economy, in which people may work just as hard but not get paid. For example, a stay-
at-home parent is not given credit in the national income accounts for all the time and
effort that go into raising children, cleaning house, and cooking food.

8. GDP focuses primarily on the market economy—the part of the economy in which
people get paid for the work they do. However, it does not cover the nonmarket
economy, in which people may work just as hard but not get paid. For example, food
prepared at home is not given credit in the national income accounts, but food
purchased at a restaurant is counted in GDP. If consumers decide to take more
advantage of the convenience of fast foods restaurants, GDP would increase.

9. a) Mexico's per capita as a percentage of US GDP per capita = 17.5 / 55.8 = 31.4%

b) India's per capita as a percentage of US GDP per capita = 6.2 / 55.8 = 11.1%

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© 2018 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.