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Chapter 07 - Measuring GDP
CHAPTER 7
MEASURING GDP
Chapter Overview
GDP is a powerful and versatile metric. There are good reasons that it is one of the most
commonly used tools in macroeconomics. It gives a simple measure of the size of an economy
and the average income of its participants. It also allows us to make comparisons over time or
across countries. The system of national income accounts gives us a picture of how output,
expenditure, and income are linked, and a framework for adding up the billions of daily
transactions that occur in an economy.
Comparing nominal and real GDP allows us to disentangle the role of increasing prices versus
increasing output in a growing economy. The GDP deflator and the inflation rate track changes
in overall price levels over time—which, as we’ll see in the next chapter, is a major task in
macroeconomics.
GDP per capita gives us a sense of the average income within a country, although it doesn’t tell
us about the distribution of income or quality of life. Finally, calculating real GDP growth rates
shows us in which direction the economy is moving, and is an important indicator of recession
or depression.
In the next chapter, we’ll dig deeper into the tools that economists use to measure price
changes and the cost of living. When we combine these tools with GDP, we have a menu of
macroeconomic metrics that will allow us to describe and analyze national and international
economies.
Learning Objectives
LO 7.1 Understand the importance of using the market value of final goods and services to
calculate GDP and explain why each component of GDP is important.
LO 7.2 Explain the equivalence of the expenditure and income approaches to valuing an
economy.
LO 7.3 Explain the three approaches that are used to calculate GDP and summarize the
categories of spending that are included in the expenditure approach.
LO 7.4 Explain the difference between real and nominal GDP.
LO 7.5 Calculate the GDP deflator.
LO 7.6 Use GDP per capita to compare economies and calculate the real GDP annual growth
rate.
LO 7.7 Discuss some limitations to GDP, including its measurement of home production, the
underground economy, environmental degradation, and well-being.
7-1
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Chapter Outline
IT’S MORE THAN COUNTING PEANUTS

Valuing an Economy
Unpacking the Definition of GDP (LO 7.1)
Production Equals Expenditure Equals Income (LO 7.2)
Approaches to Measuring GDP (LO 7.3)
The Expenditure Approach
The Income Approach
The "Value-Added” Approach
Using GDP to Compare Economies
Real versus Nominal GDP (LO 7.4)
The GDP Deflator (LO 7.5)
Using GDP to Assess Economic Health (LO 7.6)
Limitations of GDP Measures
Data Challenges (LO 7.7)
BOX FEATURE: FROM ANOTHER ANGLE – VALUING HOMEMAKERS
BOX FEATURE: FROM ANOTHER ANGLE – THE POLITICS OF GREEN GDP
GDP vs. Well-Being
BOX FEATURE: REAL LIFE – CAN MONEY BUY YOU HAPPINESS?
Beyond the Lecture
Reading Assignment: Unpacking the Definition of GDP (LO 7.1)

Have students examine the current news release of Gross Domestic Product from the Bureau of
Economic Analysis. This is a great way to introduce students to the calculation of GDP and its
significance.
Writing Assignment: Unpacking the Definition of GDP (LO 7.1)

Have students review the National Income Accounts entry in The Concise Encyclopedia of
Economics. In the article, Mack Ott underscores the importance of GDP for policy purposes.
Then, ask students to write a short essay about the following:
1. Why is GDP and national income accounting important?
2. How is GDP calculated? How is GDP useful for policy decisions?
Team Assignment/Class Discussion: Using GDP to Assess Economic Health (LO 7.5)
Have students use this data on the World Bank site to examine GDP per capita for a specific
country. You may want to assign each student (or group of students) a country to examine. Ask
the students to research their country outside of class before the in-class discussion. In class,
have students discuss the following:
1. What is GDP per capita for your country?
2. How has GDP per capita changed over time for your country?
3. Can you determine why GDP per capita has changed in this fashion?
4. How does GDP per capita for your country compare to other countries?
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Education.
Reading/Writing Assignment: Data Challenges (LO 7.6)

Have students read Hiding in the Shadows by Friedrich Schneider, a publication about the
impact of the shadow economy. This is also a great piece for a writing assignment or to
stimulate class discussion.
Clicker Questions
There are three main purposes to clicker questions. First, they are a great way to do a quick
and instant “on demand” test of student understanding of the material. You can cover
material, and instantly get feedback on student comprehension. You can see whether you need
to explain certain topics again, or move on to the next subject. Second, they are a great
method to break up the class and take a moment away from lecture. It gets the students
actively involved. Finally, certain clicker questions can be framed in a “discussion” manner, in
which you can invite students to talk about the possible right answer with their peers. You can
instruct students to convince their classmate of a right or wrong answer.
1. Which of the following is NOT included in GDP? [LO 7.1]

A. A new car that is sold to a family
B. Tires that the car manufacturer bought to put on the car
C. Gas that the family puts in the car to drive it
D. Insurance that the family buys for the car
Feedback: The tires are an intermediate good. GDP only counts final goods (or else we would
be double counting!)
2. What is an intuitive reason why the production approach and expenditure approach should
yield the same calculation for GDP? [LO 7.2]
A. Because people spend all the money they earn
B. Capital and labor just produce goods and don’t consume them
C. All expenditures by buyers must be income for sellers
D. Households earn from firms by working, and then spend the paycheck at the same firm
3. What is the well-known equation used to measure GDP using the expenditure approach? [LO
7.3]
A. Y = C + G + T
B. Y = Wages - Taxes
C. Y = S + NX + G
D. Y = C + I + G + NX
Feedback: GDP is the sum of consumption, investment, government expenditures, and net
exports. Wages, taxes, and transfer payments are not counted.
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4. We can use real GDP and nominal GDP to calculate_________ [LO 7.4]
A. The growth rate of GDP over time
B. The portion of GDP that belongs to consumption
C. The import/export ratio
D. The GDP deflator
Feedback: Part of nominal GDP increases over time will be due to price increases (inflation)
rather than real increases in production. The GDP deflator allows us to account for inflation
and measure real increases in production.
5. Why might GDP underestimate the level of economic activity in a country? [LO 7.6]
A. It doesn’t include wages
B. It doesn’t include household work
C. It doesn’t include transfer payments
D. Imports are subtracted instead of added.
Feedback: If I mow my lawn, it’s not counted in GDP. If I pay a lawn care business to mow it,
it’s counted in GDP. In both cases, production occurred. Be aware that the other answers are
true regarding GDP, but they don’t result in possible underestimation.
Solutions to End-of-Chapter Questions and Problems
Review Questions
1. U.S. car dealers sell both used cars and new cars each year. However, only the sales of the
new cars count toward GDP. Why does the sale of used cars not count? [LO 7.1]
Answer: The production of the car was already included in GDP when it was first
manufactured. To include the sale of the used car would serve to double-count the car,
once as a new car, once as a used car.
2. There is an old saying, “You can’t compare apples and oranges.” When economists calculate
GDP, are they able to compare apples and oranges? Explain. [LO 7.1]
Answer: The old saying refers to the fact that an apple is different than an orange, although
both are types of fruit. Economists compare goods like apples and oranges by calculating
the dollar value of oranges and apples produced. If the economy produces 10 apples selling
at $1.50 each and 5 oranges selling at $1 each, the economy has produced 10 × $1.50 = $15
worth of apples and 5 × $1 = $5 worth of oranges. It can be concluded that the value of
apple production is greater than the value of orange production. To compare goods like
apples and oranges, a common denominator must be found and this is why production is
converted to dollar terms using market price.
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More broadly, when economists calculate GDP, they add up the dollar value of production.
If the economy produces 10 apples selling at $1.50 each and 5 oranges selling at $1 each,
the economy has produced (10 × $1.50) + (5 × $1) = $20 of economic production.
3. When Americans buy goods produced in Canada, Canadians earn income from American
expenditures. Does the value of this Canadian output and American expenditure get counted
under the GDP of Canada or the United States? Why? [LO 7.2]
Answer: GDP is the total sum of goods and services produced within a country’s borders.
Goods produced in Canada count in Canada’s GDP even if they are consumed in the U.S.
4. Economists sometimes describe the economy as having a “circular flow.” In the most basic
form of the circular flow model, companies hire workers and pay them wages. Workers then
use these wages to buy goods and services from companies. How does the circular flow model
explain the equivalence of the expenditure and income methods of valuing an economy? [LO
7.2]
Answer: In this basic model all firm revenues are turned into wages, and all wages are spent
on the firms’ products. Thus, total production in the economy can either be measured by
summing up all of the firms’ sales (expenditure method) or all of the workers’ wages
(income method).
5. In 2011, the average baseball player earned $3 million per year. Suppose that these baseball
players spend all of their income on goods and services each year, and they save nothing. Argue
why the sum of the incomes of all baseball players must equal the sum of expenditures made
by the baseball players. [LO 7.2]
Answer: If nothing from income is left over after spending, then spending must exactly
equal income.
6. Determine whether each of the following counts as consumption, investment, government

purchases, net exports, or none of these, under the expenditure approach to calculating GDP.
Explain your answer. [LO 7.3]
a. The construction of a court house.
b. A taxicab ride.
c. The purchase of a taxicab by a taxicab company.
d. A student buying a textbook.
e. The trading of municipal bonds (a type of financial investment offered by city or state
governments).
f. A company’s purchase of foreign minerals.
Answer:
a. Courthouses are public institutions and are thus counted as part of government
expenditure. In this case, the expenditure is technically an investment by the government.
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b. A taxicab ride is a service, so it is counted as consumption.

c. The purchase of a taxicab by the company is an investment.
d. The purchase of a textbook counts as consumption.
e. Neither: Trading financial investments is considered a transfer, which does not go into
the calculation of GDP.
f. The purchase of raw materials from a foreign country is considered an import and is
therefore counted as part of net exports.
7. If car companies produce a lot of cars this year but hold the new models back in
warehouses until they release them in the new-model year, will this year’s GDP be higher,
lower, or the same as it would have been if the cars had been sold right away? Why? Does the
choice to reserve the cars for a year change which category of expenditures they fall under?
[LO 7.3]
Answer: If the cars are produced this year, they count in this year’s GDP even if they aren’t
sold until next year. If the cars are sold right away, they count as consumption (or as
government purchases if they are sold to the government, or as investment if they are sold
to a firm). If the cars are not sold but instead put into inventory, then the production is
counted as investment.
8. The value-added method involves taking the cost of intermediate outputs (i.e., outputs that
will in turn be used in the production of another good) and subtracting that cost from the value
of the good being produced. In this way, only the value that is added at each step (the sale
value minus the cost of the goods that went into producing it) is summed up. Explain why this
method gives us the same result as the standard method of counting only the value of final
goods and services. [LO 7.3]
Answer: The only difference between the valued-added method and the final-goods
method is that the production of the economy is added up along the way instead of being
totaled at the end. For example, the height of a staircase is the same whether one measures
each individual stair and adds them up as one climbs the stairs or whether one simply
climbs all of the way to the top and then measures the total height traveled.
9. Imagine a painter is trying to determine the value she adds when she paints a picture.
Assume that after spending $200 on materials, she sells one copy of her painting for $500. She
then spends $50 to make 10 copies of her painting, each of which sells for $100. What is the
value added of her painting? What if a company then spends $10 per copy to sell 100 more
copies, each for $50? What is the value the painter adds then? If it’s unknown how many copies
the painting will sell in the future, can we today determine the value added? Why or why not?
[LO 7.3]
Answer: The value-added approach determines the value of a good or service by

subtracting the value of the inputs from the value of the outputs. In this case, the painter
originally sold $1,500 worth of paintings, at a cost of $700, which implies that she added
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Education.
$800 in value by painting. After the company sells another $5,000 worth of paintings at a
cost of $1,000, we can add $4,000 to the original $1,500. If we can’t know how many copies
the painting will sell in the future and at what price, we cannot today know the final value
the painter adds through painting.
10. In a press conference, the president of a small country displays a chart showing that GDP
has risen by 10 percent every year for five years. He argues that this growth shows the
brilliance of his economic policy. However, his chart uses nominal GDP numbers. What might be
wrong with this chart? If you were a reporter at the press conference, what questions could you
ask to get a more accurate picture of the country’s economic growth? [LO 7.4]
Answer: There are many potential problems here. The biggest is that the president is talking
only about nominal GDP and not real GDP. If prices are rising 10 percent per year, then the
country is not experiencing any real growth; GDP is getting bigger only because prices are
rising.
11. Suppose that the GDP deflator grew by 10 percent from last year to this year. That is, the
inflation rate this year was 10 percent. In words, what does this mean happened in the
economy? What does this inflation rate imply about the growth rate in real GDP? [LO 7.5]
Answer: A 10 percent growth rate in the GDP deflator means that, overall, prices in the
economy have risen by 10 percent. This inflation rate implies the growth rate in real GDP is
essentially 10 percent less than the growth rate in nominal GDP.
12. An inexperienced researcher wants to examine the average standard of living in two
countries. In order to do so, he compares the GDPs in those two countries. What are two
reasons why this comparison does not lead to an accurate measure of the countries’ average
standards of living? [LO 7.4, 7.6]
Answer: Two obvious problems are price levels and population. First, if one country has
higher price levels than the other, then the nominal GDPs of the two countries are not
directly comparable. The country with higher price levels will have a comparably lower real
GDP than a country with low price levels. Second, standard of living is better reflected by
GDP per capita, not simply total GDP. For example, India’s GDP is 15 times larger than
Norway’s, but the average Indian person is quite poor compared with the average
Norwegian since there are 1.2 billion Indians and only about 5 million Norwegians. The
average Norwegian earns almost 15 times that of the average Indian.
13. In 2010, according to the International Monetary Fund, India had the world’s 10th-highest
nominal GDP, the 135th-highest nominal GDP per capita, and the 5th-highest real GDP growth
rate. What does each of these indicators tell us about the Indian economy and how life in India
compares to life in other countries? [LO 7.6]
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Education.
Answer: With the tenth largest nominal GDP, this statistic tells us that India has a huge
economy that produces lots of goods and services. With the 135th highest nominal GDP per
capita, this tells us that India is still fairly poor. Its high GDP is a result of being a large
country with a huge population, not the result of being rich. Having the fifth highest GDP
growth rate means that the standard of living in India is rising rapidly and that the country is
becoming more productive.
14. China is a rapidly growing country. It has high levels of bureaucracy and business regulation,
low levels of environmental regulation, and a strong tradition of entrepreneurship. Discuss
several reasons why official GDP estimates in China might miss significant portions of the
country’s economic activity. [LO 7.7]
Answer: In order to avoid the bureaucracy and regulation, small business owners may
operate their firms in the black market. The economic activity created by these small
business owners is real but may be hidden from the view of the government officials
collecting economic data. Similarly, official government GDP statistics are not likely to
include the costs of environmental destruction in their estimates.
15. Suppose a college student is texting while driving and gets into a car accident causing
$2,000 worth of damage to her car. Assuming the student repairs her car, does GDP rise, fall, or
stay constant with this accident? What does your answer suggest about using GDP as a
measure of well-being? [LO 7.7]
Answer: GDP will rise by $2,000 since car repairs are a service produced by the economy.
Obviously, the economy is not $2,000 better off because of this accident; $2,000 worth of
automobile was destroyed and replaced, but only the replacement, and not the destruction,
was included in the basic measure of GDP. This is an example of where GDP is a distinctly
imperfect measure of well-being.
Problems and Applications
1. Suppose a gold miner finds a gold nugget and sells the nugget to a mining company for
$500. The mining company melts down the gold, purifies it, and sells it to a jewelry maker for
$1,000. The jewelry maker fashions the gold into a necklace that it sells to a department store
for $1,500. Finally, the department store sells the necklace to a customer for $2,000. How much
has GDP increased as a result of these transactions? [LO 7.1, 7.3]
Answer: Only the market value of final goods and services count in GDP, as including the
earlier transactions counts the gold multiple times. Thus, GDP has increased by $2,000, the
price of the final necklace produced. Importantly, GDP has not increased by $500 + $1,000 +
$1,500 + $2,000 = $5,000. Counting the price at each intermediate step serves to double-
(or triple- or quadruple-) count the production. If one chose to use the value-added method
of GDP, $500 of value is added by the miner; $500 is added by the mining company ($1,000
− $500); $500 is added by the jewelry maker ($1,500 − $1,000); and $500 is added by the
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Education.
retailer ($2,000 − $1,500). Total value added is $500 + $500 + $500 + $500 = $2,000, the
same as in the final-goods method.
2. Table 7P-1 shows the price of inputs and the price of outputs at each step in the production
process of making a shirt. Assume that each of these steps takes place within the country. [LO
7.1, 7.3]
a. What is the total contribution of this shirt to GDP, using the standard expenditure method?
b. If we use a value-added method (i.e., summing the value added by producers at each step
of the production process, equal to the value of outputs minus the price of inputs), what is the
contribution of this shirt to GDP?
c. If we mistakenly added the price of both intermediate and final outputs without adjusting
for value added, what would we find that this shirt contributes to GDP? By how much does this
overestimate the true contribution?
Answer:
a. Using the standard expenditure method, the total contribution of this shirt to GDP is
$18.
b. If we use a value-added method (i.e., summing the value added by producers at each
step of the production process, equal to the value of output minus the price of inputs), the
contribution of this shirt to GDP is $1.10 + $2.40 + $14.50 = $18.00.
c. If we add the totals at each step we wind up with $1.10 + $3.50 + $18.00, or $22.60 in
total production: an overestimate of $4.60
3. The U.S. government gives income support to many families living in poverty. How does
each of the following aspects of this policy contribute to GDP? [LO 7.2]
a. Does this government’s expenditure on income support count as part of GDP? If so, in
which category of expenditure does it fall?
b. When the families buy groceries with the money they’ve received, does this expenditure
count as part of GDP? If so, in which category does it fall?
c. If the families buy new houses with the money they’ve received, does this count as part of
GDP? If so, in which category does it fall?
Answer:
a. Government income support does not count as part of GDP. Government expenditures
on goods and services count as part of G (government spending), but transfers of income
from one group to another do not count as part of G.
b. When recipients of government transfers spend the money on groceries, this spending
counts as C (consumption). The fact that the spending of the government assistance counts
as part GDP is why the transfer itself doesn’t count as part of GDP. Counting the
government assistance as part of G when it is transferred and then again as C when it is
spent would be double-counting the money.
c. When recipients of government transfers spend the money building new housing, this
spending counts as I (investment).
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Education.
4. Given the following information about each economy, either calculate the missing variable
or determine that it cannot be calculated. [LO 7.2, 7.3]
a. If C = $20.1 billion, I = $3.5 billion, G = $5.2 billion, and NX = –$1 billion, what is total
income?
b. If total income is $1 trillion, G = $0.3 trillion, and C = $0.5 trillion, what is I?
c. If total expenditure is $675 billion, C = $433 billion, I = 105 billion, and G = $75 billion, what
is NX? How much are exports? How much are imports?
Answer: The expenditure method of calculating the size of an economy involves adding up
all spending on goods and services produced in an economy and subtracting spending on
imports. The sum of these categories and the equivalence of income (Y) and expenditure
give us the equation Y = C (consumption) + I (investment) + G (government purchases) + NX
(net exports).
a. Total income = C + I + G + NX = $20.1 + $3.5 + $5.2 − $1 = $27.8 billion.
b. Total income = C + I + G + NX. $1t = $0.5t + I + $0.3t + NX. Solving this, I = $0.2 − NX.
Since there are two unknowns (I and NX), neither can be determined.
c. Total income = C + I + G + NX. $675 = $433 + $105 + $75 + NX. Solving for NX, you get NX
= $62 billion. Exports and imports cannot be determined. Since NX is positive, exports are
greater than imports, but we cannot figure out exact amounts with the information given.
5. Using Table 7P-2, calculate the following. [LO 7.2, 7.3]

a. Total gross domestic product and GDP per person.
b. Consumption, investment, government purchases, and net exports, each as a percentage of
total GDP.
c. Consumption, investment, government purchases, and net exports per person.
Answer:
a. GDP = C + I + G + NX = $770,000 + $165,000 + $220,000 − $55,000 = $1,100,000. GDP per
person = $1,100,000 ÷ 50 = $22,000.
(Mathematical note: since both GDP and population are measured in millions this will
cancel out so we can ignore it. In other words $1,100,000/50 is the same as $1,100,000
million divided by 50 million. This same principle applies in parts b and c below.)
b. C as a % of GDP = $770,000/1,100,000 = 0.7, or 70%. I as a % of GDP =
$165,000/1,100,000 = 0.15, or 15%. G as a % of GDP = $220,000/1,100,000 = 0.2, or 20%.
NX as a % of GDP = −$55,000/1,100,000 = 0.05, or 5%.
c. C/person = $770,000/50 = $15,400. I/person = $165,000/50 = $3,300. G/person =
$220,000/50 = $4,400. NX/person = −$55,000/50 = −$1,100
6. Determine which category each of the following economic activities falls under:
consumption (C), investment (I), government purchases (G), net exports (NX), or not included in
GDP. [LO 7.3]
a. The mayor of Chicago authorizes the construction of a new stadium using public funds.
b. A student pays rent on her apartment.
c. Parents pay college tuition for their son.
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d. Someone buys a new Toyota car produced in Japan.

e. Someone buys a used Toyota car.
f. Someone buys a new General Motors car produced in the United States.
g. A family buys a house in a newly-constructed housing development.
h. The U.S. Army pays its soldiers.
i. A Brazilian driver buys a Ford car produced in the United States.
j. The Department of Motor Vehicles buys a new machine for printing drivers’ licenses.
k. An apple picked in Washington in October is bought at a grocery store in Mississippi in
December.
l. Hewlett-Packard produces a computer and sends it to a warehouse in another state for sale
next year.
Answer:
a. The stadium is a government purchase.
b. The student is consuming housing services.
c. The parents are purchasing education services.
d. Someone buys a new Toyota car produced in Japan and this increases net exports.
e. Not included in GDP. Only the initial production of a good is included in GDP (in this case,
Japan’s GDP).
f. The person is consuming an automobile.
g. New home construction is included in GDP as residential investment.
h. The government is spending on national defense services.
i. Net exports rise for the United States. In Brazil, net exports fall and consumption rises,
leading to no net change in the Brazilian GDP.
j. The government is spending money on goods and services.
k. The apple is produced and consumed in the United States, increasing consumption.
l. The computer is counted as inventory.
7. Table 7P-3 shows economic activity for a very tiny country. Using the expenditure approach
determine the following. [LO 7.3]
a. Consumption.
b. Investment.
c. Government purchases.
d. Net exports.
e. GDP.
Answer:
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Education.
a. $707,000.
b. $600,000.
c. $800,000.
d. -$200,000.
e. $1,907,000.
8. During the recent recession sparked by financial crisis, the U.S. economy suffered
tremendously. Suppose that, due to the recession, the U.S. GDP dropped from $14 trillion to
$12.5 trillion. This decline in GDP was due to a drop in consumption of $1 trillion and a drop in
investment of $500 billion. The U.S. government, under the current president, responded to
this recession by increasing government purchases. [LO 7.3]
a. Suppose that government spending had no impact on consumption, investment, or net
exports. If the current presidential administration wanted to bring GDP back up to $14 trillion,
how much would government spending have to rise?
b. Many economists believe that an increase in government spending doesn’t just directly
increase GDP, but that it also leads to an increase in consumption. If government spending rises
by $1 trillion, how much would consumption have to rise in order to bring GDP back to $14
trillion?
Answer:
a. To counteract a $1 trillion drop in C and a $0.5 trillion drop in I, you need to raise G by
$1.5 trillion (assuming the increase in G doesn’t affect any other variables in the equation—
expenditures = C + I + G + NX).
b. To counteract a $1 trillion drop in C and a $0.5 trillion drop in I with only $1 trillion in
increased G, C would also have to rise by $0.5 trillion.
9. Assume Table 7P-4 summarizes the income of Paraguay. [LO 7.3]

a. Calculate profits.
b. Calculate the GDP of Paraguay using the income approach.
c. What would GDP be if you were to use the value-added approach?
d. What would GDP be if you were to use the expenditure approach?
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Education.
Answer:
a. Profits = Total business expenditures – Total business revenues = $9 billion.
b. Wages + Interest + Rental income + Profits = $8.3 + $0.7 + $9 = $18 billion.
c. $18 billion: All methods of calculating GDP result in the same value.
d. $18 billion: All methods of calculating GDP result in the same value.
10. Table 7P-5 provides information about the cost of inputs and the value of output for the
production of a road bike. Note there are four different stages of production. [LO 7.3]
a. What value is added by the supplier of the raw materials?
b. What value is added by the tire maker?
c. What value is added by the maker of the frame and components?
d. What value is added by the bike mechanic?
e. What value is added by the bike store?
f. What is the total contribution of the bike to GDP?
Answer:
a. $190 = ($20 × 2) + $80 + $70. The raw materials include the rubber for two tires, the
aluminum, and the other component materials.
b. $20 = ($30 – $20) × 2. Value added is the difference between the value of the good
produced ($30 per tire in this case) and the cost of purchased materials ($20 per tire).
c. $100 = $250 – ($80 + $70).
d. $40 = $350 – [$250 + ($30 × 2)].
e. $150 = $500 – $350.
f. $500 = Value of final good = sum of value added = $190 + $20 + $100 + $40 + $150
11. Imagine that the United States produces only three goods: apples, bananas, and carrots.
The quantities produced and the prices of the three goods are listed in Table 7P-6. [LO 7.4] a.
Calculate the GDP of the United States in this three-goods version of its economy.
b. Suppose that a drought hits the state of Washington. This drought causes the quantity of
apples produced to fall to 2. Assuming that all prices remain constant, calculate the new U.S.
GDP.
c. Assume, once again, that the quantities produced and the prices of the three goods are as
listed in Table 7P-6. Now, given this situation, carrot sellers decide that the price of carrots is
too low, so they agree to raise the price. What must be the new price of carrots if the U.S. GDP
is $60?
Answer:
a. GDP is the sum of the dollar value of the goods and services produced in a country. In
this case, GDP = $2 × 5 (apples) + $1 × 10 (bananas) + $1.50 × 20 (carrots) = $50.
b. The new GDP = $2 × 2 (apples) + $1 × 10 (bananas) + $1.50 × 20 (carrots) = $44.
c. After carrot sellers raise the price of carrots, the equation becomes $2 × 5 + $1 × 10 + P
× 20 = $60, where P is the price of carrots. We must solve for P, subtracting 20 from both
sides leaving 20(P) = 40. Now divide both sides by 20, leaving P = $2.
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Education.
12. Based on Table 7P-7, calculate nominal GDP, real GDP, the GDP deflator, and the inflation
rate in each year, and fill in the missing parts of the table. Use 2014 as the base year. [LO 7.4]
Answer:
Nominal GDP = Sum of quantity × Price for each year. Real GDP = Sum of quantity in each
year × Price in base year (2014). GDP deflator = (Nominal GDP/Real GDP) x 100 for each
year. Inflation rate = [(New deflator − Old deﬂator)/Old deﬂator] × 100.
13. Suppose that the British economy produces two goods: laptops and books. The quantity
produced and the prices of these items for 2015 and 2016 are shown in Table 7P-8. [LO 7.4,
7.5]
a. Let’s assume that the base year was 2015, so that real GDP in 2015 equals nominal GDP in
2015. If the real GDP in Britain was $15,000 in 2015, what was the price of books?
b. Using your answer from part a, if the growth rate in nominal GDP was 10 percent, how many
books must have been produced in 2016?
c. Using your answers from parts a and b, what is the real GDP in 2016? What was the growth
rate in real GDP between 2015 and 2016?
Answer:
a. GDP is the sum of the dollar value of the goods and services produced in a country. In
2015: $15,000 = 50($200) + 1,000(P), where P is the price of books. Solving for P, we get a
price per book of $5.
b. The first thing we need to do is calculate nominal GDP in 2016 if nominal GDP has grown
10%. GDP(2016) = GDP(2015) × 1.1 = $16,500. Now set $16,500 = 100($150) + Q($10),
where Q is the quantity of books produced. Solving for Q, we find that 150 books must have
been produced.
c. Using 2015 as the base year, to find real GDP in year 2016, you take the quantities
produced in year 2016 multiplied by the prices in 2015. Real GDP(2016) = 100($200) +
150($5) = $20,750. The change in real GDP = (New GDP − Old GDP)/Old GDP = ($20,750 −
$15,000)/$15,000 = 0.383 = 38.3%.
14. Based on Table 7P-9, calculate nominal GDP per capita in 2015 and 2016, and the real GDP
growth rate between the two years. Which countries look like they experienced recession in
2015–2016? [LO 7.6]
Answer: Nominal GDP/capita = Nominal GDP/Population Real GDP growth rate = (Real
GDPnew – Real GDPold)/Real GDPold A recession is defined as a period of significant decline in
economic activity. Both Germany and the US have negative real GDP growth year over year
indicating that they are both likely experiencing a recession. Egypt and Ghana are both
7-14
Education.
experiencing significant growth, so they are clearly not in recession. Argentina is a

borderline case. It is experiencing very slow but positive GDP growth.
15. Table 7P-10 describes the real GDP and population of a fictional country in 2015 and 2016.
[LO 7.6]
a. What is the real GDP per capita in 2015 and 2016?
b. What is the growth rate in real GDP?
c. What is the growth rate in population?
d. What is the growth rate in real GDP per capita?
Answer:
a. Real GDP per capita equals real GDP divided by population. The only trick here is to get
the right number of zeroes on the billions and millions. The real GDP per capita in 2015 is
$10 billion/1.0 million = $10,000. The real GDP per capita in 2016 is $12 billion/1.1 million =
$10,909.
b. The growth rate of GDP is [($12 million – $10 million)/$10 million] × 100 = 20 percent.
c. The growth rate in population is [(1.1 million – 1.0 million)/1 million] × 100 = 10 percent.
d. The growth rate in per capita GDP is [(10,909 – 10,000)/10,000] × 100 = 9 percent.
16. Table 7P-11 shows data on population and expenditures in five countries, as well as the
value of home production, the underground economy, and environmental externalities in each.
[LO 7.6, 7.7]
a. Calculate GDP and GDP per capita in each country.
b. Calculate the size of home production, the underground economy, and environmental
externalities in each country as a percentage of GDP.
c. Calculate total and per capita “GDP-plus” in each country by including the value of home
production, the underground economy, and environmental externalities.
d. Rank countries by total and per capita GDP, and again by total and per capita “GDP-plus.”
Compare the two lists. Are the biggest and the smallest economies the same or different?
Answer:
a. GDP = C + I + G + NX. GDP per capita = GDP/population.
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Education.
b. The size of home production, the underground economy, and environmental externalities
in each country as a percentage of GDP is the value of each term divided by GDP. The total
can be found by summing up the individual percentages.
c. GDP-plus = GDP + home production + underground economy + environmental

externalities (which are generally negative so this subtracts from GDP). GDP-plus per capita
= GDP-plus/Population.
d. As can be seen from the table, the parts in GDP-plus that are not counted in GDP can
make a big difference. The biggest change comes in comparing Bohemia and Saxony. Under
GDP per capita Bohemia is about two-thirds richer than Saxony. Under GDP-plus per capita,
Bohemia is more than 2.8 times richer than Saxony.
17. Suppose a parent was earning $20,000 per year working at a local firm. The parent then
decides to quit his job in order to care for his child, who was being watched by a babysitter for
$10,000 per year. Does GDP rise, fall, or stay constant with this action, and how much does GDP
change (if at all)? [LO 7.7]
Answer: GDP falls because the parent is not working in the labor force and is providing a
do-it-yourself service. Previously, GDP generated by the father and the babysitter (by the
income method) would have been $20,000 (from the father’s job) + $10,000 (from the
babysitter’s job) = $30,000. After the change, the GDP generated is $0 since the father
watching his own children is not a market transaction and therefore not counted in GDP.
Thus, GDP falls $30,000. The fact that household work is not counted as part of GDP if
conducted by a member of the family but is counted as part of GDP if a market transaction
takes place is a clear failing of using GDP as a way to measure economic well-being.
7-16
Education.
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On this basis matters stood in 1842, when the The position in
Ashburton Treaty was signed. There was joint 1842.
occupation of the Oregon territory by British and American subjects,
and freedom of trade for both. Lord Ashburton had been empowered
to negotiate for a settlement of the North-Western as well as the
North-Eastern frontier line; but the latter, which involved the question
of the Maine—New Brunswick boundary, being the more pressing
matter, it was thought well to allow the determination of the line West
of the Rocky Mountains to stand over for the moment. As soon as
Lord Ashburton’s Treaty had been signed at Washington in August,
1842, Lord Aberdeen, then Foreign Secretary in Sir Robert Peel’s
Ministry, made overtures to the United States with a view to an early
settlement of the Oregon question. A long diplomatic controversy
ensued, complicated by changes of government in the United States,
and tending, as is constantly the case in such negotiations, to
greater instead of less divergence of view.
The Americans contended that they had a title to the The rival claims.
whole territory up to the Russian line, and they
claimed the entire region drained by the Columbia river. As a
compromise, however, they had already, in the negotiations which
ended in the Convention of 1827, suggested that the boundary line
along the 49th parallel should be continued as far as the Pacific, the
navigation of the Columbia river being left open to both nations. This
offer was repeated as the controversy went on, with the exception
that on the one hand free navigation of the Columbia river was
excluded, and on the other the American Secretary of State
proposed
‘to make free to Great Britain any port or ports on Vancouver’s Island,
south of this parallel, which the British Government may desire’.[243]
The counter British proposal was to the effect that the boundary line
should be continued along the 49th parallel until it intersected the
North-Eastern branch of the Columbia river, and that then the line of
the river should be followed to its mouth, giving to Great Britain all
the country on the north of the river and to the United States all on
the south, the navigation of the river being free to both nations, and a
detached strip of coast land to the north of the river being also
conceded to the United States, with the further understanding that
any port or ports, either on the mainland or on Vancouver Island,
South of the 49th parallel, to which the United States might wish to
have access, should be constituted free ports.
The arguments advanced on both sides, based on alleged priority
of discovery and settlement and on the construction of previous
treaties, are contained in the Blue Book of 1846, and are too
voluminous to be repeated here. The controversy went on from 1842
to 1846; and, when the spring of the latter year was reached, the
Americans had withdrawn their previous offer and had refused a
British proposal to submit the whole matter to arbitration. There was
thus a complete deadlock, but shortly afterwards a debate in
Congress showed a desire on the American side to effect a friendly
settlement of a dispute which had become dangerous, and, the
opportunity being promptly taken by the British Government, a Draft
Treaty was sent out by Lord Aberdeen, which was submitted by
President Polk to the Senate, who by a large majority advised him to
accept it.[244] The Treaty was accordingly signed at Settlement of the
Washington on the 15th of June, 1846. By the First Oregon boundary
question by the
Article the boundary line was Treaty of 1846.
‘continued Westward along the said forty-ninth parallel of North

latitude to the middle of the channel which separates the continent
from Vancouver Island, and thence Southerly, through the middle of
the said channel and of Fuca’s Straits, to the Pacific Ocean’,
the navigation of the channel and straits South of the 49th parallel
being left free and open to both nations. By the Second Article of the
same Treaty, the navigation of the Columbia river, from the point
where the 49th parallel intersects its great Northern branch, was left
open to the Hudson’s Bay Company and to all British subjects
trading with the same. The effect of the Treaty was that Great Britain
abandoned the claim to the line of the Columbia river, and the United
States modified its proposal to adopt the 49th parallel as the
boundary so far as to concede the whole of Vancouver Island to
Great Britain. The news that the treaty had been signed reached
England just as Sir Robert Peel’s ministry was going out of office.
The delimitation of the boundary which the Treaty The San Juan
had affirmed gave rise to a further difficulty. The Treaty boundary question.
having provided that the sea line was to be drawn southerly through
the middle of the channel which separates Vancouver Island from
the continent and of Fuca’s Straits into the Pacific Ocean, the two
nations were unable to agree as to what was the middle of the
channel in the Gulf of Georgia between the Southern end of
Vancouver Island and the North American coast. The main question
at issue was the ownership of the island of San Juan, and the
subject of dispute was for this reason known as the San Juan
boundary question. The British claim was that the line should be
drawn to the Eastward of the island, down what was known as the
Rosario Straits. The Americans contended that it should be drawn on
the Western side, following the Canal de Haro or Haro Channel.
Eventually it was laid down by the 34th and following Arbitration under
Articles of the Treaty of Washington of 8th of May, the Treaty of 1871.
1871—the same Treaty which provided for arbitration on the
Alabama question—that the Emperor of Germany should arbitrate as
to which of the two claims was most in accordance with the true
interpretation of the Treaty of 1846, and that his award should be
absolutely final and conclusive. On the 21st of October, 1872, the
arbitrator gave his award in favour of the United States, and it was
immediately carried into effect, thus completing the boundary line
from the Atlantic to the Pacific.
In a message to Congress on the subject of the San The Alaska
Juan Boundary Award, President Grant stated boundary question.
‘The Award leaves us, for the first time in the history of the United
States as a nation, without a question of disputed boundary between
our territory and the possessions of Great Britain on this continent;’
and he suggested that a joint Commission should determine the line
between the Alaska territory and the conterminous possessions of
Great Britain, on the hypothesis that here there was no ground of
dispute and that all that was required was the actual delimitation of
an already admitted boundary line. The matter proved to be more
complex than the President’s words implied.
By a Treaty signed on the 30th of March, 1867, the Russian America
territory now known as Alaska was ceded by Russia to ceded
States.
to the United
the United States. It was the year in which the

Dominion Act was passed; and, when British Columbia[245] in 1871
joined the Dominion, Canada became, in respect of that province, as
well as in regard to the Yukon Territory, a party to the Alaska
boundary question. The limits of Russian America, as it was then
called, had been fixed as far back as 1825, when, by a treaty
between Great Britain and Russia, dated the 28th of Line of demarcation
February in that year, a line of demarcation was fixed between
Russian
British and
between British and Russian possessions possessions in

North America
‘upon the coast of the continent and the islands of America to drawn in 1825.
the North-West’.
The line started from the Southernmost point of Prince of Wales
Island, which point was defined as lying in the parallel of 54° 40′
North latitude and between the 131st and 133rd degrees of West
longitude. It was carried thence to the North, along the channel
called Portland Channel, up to that point of the continent where it
intersected the 56th parallel of North latitude. From this point it
followed the summit of the mountains parallel to the coast until it
intersected the 141st degree of West longitude, and was carried
along that meridian to the Arctic Ocean. The Treaty provided that the
whole of Prince of Wales Island should belong to Russia, and that
wherever the summit of the mountains running parallel to the coast
between the 56th parallel of North latitude and the point where the
boundary line intersected the 141st meridian was proved to be at a
distance of more than 10 marine leagues from the ocean, the line
should be drawn parallel to the windings of the coast at a distance
from it never exceeding 10 marine leagues.
Free navigation of the rivers which flowed into the Free navigation of
Pacific Ocean across the strip of coast assigned to rivers.
Russia was conceded in perpetuity to British subjects; and, after the
transfer of Russian America to the United States, the Twenty-sixth
Article of the Treaty of Washington of 1871 provided that the
navigation of the rivers Yukon, Porcupine, and Stikine should for
ever remain free and open to both British and American citizens,
subject to such laws and regulations of either country within its own
territory as were not inconsistent with the privilege of free navigation.
In 1872, the year after the entry of British Columbia Negotiations for a
into the Dominion of Canada, mining being settlement of the
boundary with the
contemplated in the northern part of British Columbia, United States.
overtures were, at the instance of the Canadian Government, made
to the United States to demarcate the boundary, which had never yet
been surveyed and delimited. The probable cost of a survey caused
delay, and no action had been taken when in 1875 and 1876
disputes arose as to the boundary line on the Stikine river. The
Canadian Government in 1877 dispatched an engineer to ascertain
approximately the line on the river, and the result of his survey was
in the following year provisionally accepted by the United States as a
temporary arrangement, without prejudice to a final settlement.
Negotiations began again about 1884, and, by a Convention signed
at Washington on the 22nd of July, 1892, it was The Convention of
provided that a coincident or joint survey should be 1892.
undertaken of the territory adjacent to the boundary line from the
latitude of 54° 40′ North to the point where the line intersects the
141st degree of West longitude. It was added that, as soon as
practicable after the report or reports had been received, the two
governments should proceed to consider and establish the boundary
line. The time within which the results of the survey were to be
reported was, by a supplementary Convention, extended to the 31st
of December, 1895, and on that date a joint report was made, but no
action was taken upon it at the time.
In 1896 the Klondyke goldfields were discovered in Discovery of gold at
what now constitutes the Yukon district of the North- Klondyke.
West Territories, and in the following year there was a large
immigration into the district. The goldfields were most accessible by
the passes beyond the head of the inlet known as the Lynn canal,
the opening of which into the sea is within what had been the
Russian fringe of coast. The necessity therefore for determining the
boundary became more urgent than before. In 1898 the British
Government proposed that the matter should be Further
referred to three Commissioners, one appointed by negotiations.
each government and the third by a neutral power; and that, pending
a settlement, a modus vivendi should be arranged. A provisional
boundary in this quarter was accordingly agreed upon, but, instead
of the Commission which had been proposed, representatives of
Great Britain and the United States alone met in 1898 and 1899 to
discuss and if possible settle various questions at issue between the
two nations, among them being the Alaska boundary. They were to
endeavour to come to an agreement as to provisions for the
delimitation of the boundary
‘by legal and scientific experts, if the Commission should so decide, or
otherwise’,
memoranda of the views held on either side being furnished in
advance of the sittings of the Commission. Again no settlement was
effected.
The dispute between Great Britain and Venezuela The Convention of
as to the boundary between Venezuela and British 1903. Joint
Commission
Guiana, in which the Government of the United States appointed.
had intervened, had, by a Convention signed in February, 1897,
been referred to arbitration, the Arbitrators being five in number, two
Englishmen, two Americans, and one representative of a neutral
State. In July, 1899, before the award in this arbitration had been
given, Lord Salisbury proposed to the American Government that a
treaty on identical lines with the Venezuela boundary Convention
should apply arbitration to the Alaska Boundary question. To this
procedure, giving a casting vote on the whole question to a
representative of a neutral power, the American Government took
exception, and suggested instead a Tribunal consisting of ‘Six
impartial Jurists of repute’, three to be appointed by the President of
the United States and three by Her Britannic Majesty. A suggestion
made by the British Government that one of the three Arbitrators on
either side should be a subject of a neutral state was not accepted;
and eventually, on the 24th of January, 1903, a Convention was
signed at Washington, constituting a tribunal in accordance with the
American conditions. The three British representatives were the Lord
Chief Justice of England and two leading Canadians, one of them
being the Lieutenant-Governor of the Province of Quebec.
The preamble of the Convention stated that its object was a
‘friendly and final adjustment’ of the differences which had arisen as
to the ‘true meaning and application’ of the clauses in the Anglo-
Russian Treaty of 1825 which referred to the Alaska boundary. The
tribunal was to decide where the line was intended to Points for decision.
begin; what channel was the Portland Channel; how
the line should be drawn from the point of commencement to the
entrance to the Portland Channel; to what point on the 56th parallel
and by what course it should be drawn from the head of the Portland
Channel; what interpretation should be given to the provision in the
Treaty of 1825 that from the 56th parallel to the point where the
141st degree of longitude was intersected the line should follow the
crest of the mountains running parallel to the coast at a distance
nowhere exceeding ten marine leagues from the ocean; and what
were the mountains, if any, which were indicated by the treaty.
The main point at issue was whether the ten Main point at issue.
leagues should be measured from the open sea or
from the heads of the inlets, some of which ran far into the land. If
the latter interpretation were adopted, the result would be to give to
the United States control of the main lines of communication with the
Klondyke Mining district, just as the Maine boundary threatened to
cut, and in large measure did cut, communication between the
Maritime Provinces and Quebec.
The Convention provided that all questions The Award.
considered by the tribunal, including the final award,
should be decided by a majority of the Arbitrators. The tribunal was
unanimous in deciding that the point of commencement of the line
was Cape Muzon, the Southernmost point of Dall Island on the
Western or ocean side of Prince of Wales Island. A unanimous
opinion was also given to the effect that the Portland Channel is the
channel which runs from about 55°56′ North latitude and passes
seawards to the North of Pearse and Wales Islands; but on all
subsequent points there was a division of opinion, the three
American representatives and the Lord Chief Justice of England
giving a majority award from which the two Canadian members of
the tribunal most strongly dissented. The majority decided that the
outlet of the Portland Channel to the sea was to be identified with the
strait known as Tongass Channel, and that the line should be drawn
along that channel and pass to the South of two islands named
Sitklan and Khannaghunut islands, thus vesting the ownership of
those islands in the United States. They also decided that the
boundary line from the 56th parallel of North latitude to the point of
intersection with the 141st degree of West longitude should run
round the heads of the inlets and not cross them. One section of the
line was not fully determined owing to the want of an adequate
survey. The net result of the award was to substantiate the American
claims, to give to the United States full command of the sea
approaches to the Klondyke Mining districts, and to include within
American territory two islands hard by the prospective terminus of a
new Trans-Canadian Railway.
It may be added that the Treaty of 30th March, The Behring Sea
1867, by which Alaska was transferred from Russia to arbitration.
the United States, gave rise not only to the territorial boundary
dispute of which an account has been given above, but also to a
controversy as to American and British rights in the Behring Sea,
more especially in connexion with the taking of seals. The questions
at issue were settled at a much earlier date than the land boundary,
having been, by a treaty signed at Washington on the 29th of
February, 1892, referred to a tribunal of seven arbitrators, two
named by the United States, two by Great Britain, and one each by
the President of the French Republic, the King of Italy, and the King
of Sweden and Norway. The arbitrators met in Paris and gave their
award on the 15th of August, 1893, the substance of the award, as
concurred in by the majority of the arbitrators, being that Russia had
not exercised any exclusive rights of jurisdiction in Behring Sea or
any exclusive rights to the seal fisheries in that sea outside the
ordinary three-mile limit, and that no such rights had passed to the
United States.
The last phase in the evolution of the Boundary line The Treaty of April
between Canada and the United States is the Treaty 11, 1908.
of 11th of April, 1908, ‘for the delimitation of International Boundaries
between Canada and the United States’, by which machinery is
provided ‘for the more complete definition and demarcation of the
International Boundary’, and for settling any small outstanding points
such as, e.g., the boundary line through Passamaquoddy Bay.
FOOTNOTES:
[230] See the report of the Lords of the Committee of Council for
Plantation Affairs, October 6, 1763, given at pp. 116-18 of
Documents Relating to the Constitutional History of Canada,
1759-91 (Shortt and Doughty).
[231] See State Papers, vol. i, Part II, p. 1369.
[232] Note.—The territory in dispute, however, seems partly to
have been claimed by the United States as Federal Territory and
not as belonging to Massachusetts. See the letter from Gallatin to
Monroe, December 25, 1814. State Papers for 1821-2, vol. ix, p.
562.
[235] See the two Blue Books of July, 1840, as to the ‘North
American Boundary’.
[236] The above account of the boundary disputes between Great
Britain and the United States in the region of Maine and New
Brunswick has been mainly taken from the very clear and
exhaustive Monograph of the Evolution of the Boundaries of the
Province of New Brunswick, by William F. Ganay, M.A., Ph.D.,
1901, published in the Transactions of the Royal Society of
Canada, 1901-2, and also published separately.
[237] It will be found in the State Papers for 1821-2, vol. ix, p.
791.
[238] The report will be found in the State Papers, 1866-7, vol.
lvii, p. 803.
[239] This point is described in the report as ‘100 yards to the
North and East of a small island named on the map Chapeau and
lying opposite and near to the North-Eastern point of Isle-Royale’.
[240] State Papers, vol. i, Part I (1812-14), p. 784.
[241] State Papers, vol. vi, 1818-19, p. 3—also in Hertslet’s
collection.
[242] As to the discovery of the Rocky Mountains, see vol. v, Part
I of Historical Geography of the British Colonies, p. 214 and note.
[243] Correspondence relative to the negotiation of the question
of the disputed right to the Oregon Territory on the North-West
coast of America subsequent to the Treaty of Washington of
August 9, 1842. Presented to Parliament in 1846, p. 39.
[244] A good account of the negotiations is in a Historical Note,
1818-46, included in a Blue Book of 1873, C.-692, North America,
No. 5 (1873).
[245] The boundaries of British Columbia had been fixed by an
Imperial Act of 1863.
INDEX
Abercromby, 51, 102, 126, 189, 203.
Acadia, 49, 50, 69, 238 n., &c.
Act of 1791.
See Canada Act.
Adams, John, 289.
Adet, 289.
Administration of Justice.
See Justice, Administration of.
Albany, 24, 140, 145-9, 154, 157, 165-72, 174-5, 182, 203.
Alleghany, the, 9, 19, 59, 83.
Allen, Ethan, 101, 106, 107, 119 n., 191.
American Civil War, 228-9.
Amherst, Lord, 11, 15, 17, 19, 23, 63, 102, 106, 125, 126, 129,
130, 189, 203, 289.
Amiens, Peace of.
See Treaty.
Anne, Fort, 164, 166, 167, 188.
Anticosti Island, 2, 3, 80.
Arbuthnot, Marriot, 127, 198.
Arnold, Benedict, 98 n., 101, 108-12, 113, 114, 116-20, 122, 123,
157, 175, 177, 178, 180 n., 185, 198, 199, 291.
Ashburton Treaty.
See Treaty.
Assemblies, Legislative, 3, 4, 71-3, 77, 87-9, 241, 243, 245, 257-
65, 295-6, 318-9.
Australia, 32, 44, 45, 205, 278.
Bahamas, 223.
Barbados, 52 n., 253-4.
Bathurst, Lord, 278.
Batten Kill river, 169, 170, 175.
Baum, Colonel, 169-71, 170 n.
Baye des Chaleurs, 2, 224.
Beaver Creek, 27, 83.
Bedard, 307.
Bedford or Raestown, 17, 19, 20.
Belêtre, 12.
Bemus’ Heights, 174.
Bennington, 168-72, 171-2 n., 198.
Bermuda, 257.
Bird, Lieutenant, 153, 156.
Bloody Run.
See Parents Creek.
Bonaparte, Jerome, 300.
Boston, 85, 95, 96, 107, 130-2, 182, 213, 221, 309.
Bouquet, Henry, 11, 17, 18 n., 19, 20 and n., 21, 22 and n., 23, 24,
26, 27, 188.
Bouquet river, 159.
Braddock, General, 14, 18, 19, 21, 174.
Bradstreet, Colonel, 23-6, 98 n.
Brandywine, 134, 289.
Brant County, 234.
Brant, Joseph, 97 n., 119 n., 148-58, 150 n., 185-7, 186 n., 232-5.
Brant, Molly, 58, 149, 155.
Brantford, 152, 234, 235 n.
Breyman, Colonel, 170, 171, 176, 178, 179 n.
Brock, Isaac, 317.
Bunker’s Hill, 90, 106, 125-6, 130, 131, 150, 303.
Burgoyne, 116, 122, 125, 126, 129, 130, 131, 138, 139, 144, 145,
146, 152, 158-85, 160 n., 180 n., 182 n., 187, 188, 203, 237-
8, 303.
Burke, 54, 83, 89, 117, 128, 135, 216, 244.
Burke’s Act 1782, 298 n.
Burnet, Governor, 147.
Burton, Colonel, 63-5, 67.
Bushy Run, 21.
Butler, Colonel John, 152, 155, 156, 185.
Butler, Walter, 187.
Caghnawagas, 148-9 n.
Cahokia, 10.
Camden, 174, 197, 198.
Camden, Lord, 87, 129 n.
Campbell, Captain, 15.
Campbell, Colonel, 196.
Campbell, Major John, 98 n., 286.
Canada, 4-6, 8-10, 37, 39, 45, 50-3, 59-74, 114-5, 206-7, 210-1,
238-41, 263-4, 289-319 et passim.
Canada, Lower, 232, 238 and n., 246-319.
Canada, Upper, 85, 223-5, 232, 238 n., 246-319.
Canada Act, 239, 242-79, 312.
Canada Trade Act, 271.
Canadians.
See French Canadians.
Canals, 191, 239.
Canning, George, 310.
Cap François, 199.
Cap Rouge, 110.
Cape Breton, 3, 80, 223, 224, 237 n., 238 n., 292.
Cape Diamond, 112.
Carignan-Salières Regiment, 230.
Carleton, 32, 68, 75, 76, 89-100, 94 n., 95 n., 96 n., 102, 103-16,
118 and n., 119 n., 122-6, 130, 131, 133, 135, 137-44, 152,
158, 159, 161, 165, 173, 182, 185, 201, 220, 226, 236-88,
250 n., 295, 303.
Carleton Island, 185.
Carleton, Major, 188.
Carlisle, 19, 20.
Carlisle, Lord, 214.
Carolina, 196-9, 218, 220, 222, 304.
Carroll, 122.
Castine, 188.
Castlereagh, Lord, 303, 310.
Castleton, 164, 167, 169.
Cataraqui.
See Frontenac, Fort.
Cavendish, Lord John, 215, 216.
Cayugas, 148, 234.
Cedars, the, 119 and n., 120, 152.
Chambly, Fort, 102, 107, 108 and n., 122, 123, 239.
Champlain, Lake, 2, 52 n., 90, 101, 102, 105, 106, 109, 122-5,
130, 138, 145, 157, 159, 162-4, 174, 185, 187, 203, 239.
Charleston, 132, 173 n., 196, 197, 201, 222, 282-3.
Chartres, Fort, 9, 23, 27, 28.
Chatham.
See Pitt.
Chaudière river, 109, 185.
Cherry Valley, 151, 186, 187, 212.
Chesapeake Bay, 134, 175, 199, 200.
Chesapeake frigate, 303.
Choiseul, 31.
Christie, Ensign, 17.
Christie, Robert, 315, &c.
Church of England, 265-7.
Civil List, 255.
Clark, George Rogers, 187, 188, 236 n.
Clarke, Sir Alured, 271, 272, 304.
Claus, Colonel Daniel, 152.
Clinton, Sir Henry, 125, 126, 129 and n., 132-4, 175, 177, 181,
195-201.
Clive, Lord, 160.
Cobbett, William, 313.
Colbert, 64, 71.
Collier, Admiral, 127, 188.
Colonies, Relation to Mother Country, 37-59.
Companies, 40.
Congress, 60, 95, 97, 101, 106, 120, 184, 190, 191, 211, 213, 214,
300.
Connecticut, 101, 164, 166, 167, 186 n., 221.
Conway, General, 115, 136 n.
Cornwallis, Lord, 126, 127, 130, 132, 133, 197-201, 304.
Council of Trade and Plantations.
See Trade.
Councils, Executive, 142-3, 194, 252-65, 272, 296.
Councils, Legislative, 73, 79, 87, 105, 194-5, 241-3, 249-67.
Courtenay, 237.
Cowpens, 113, 198.
Craig, Sir James, 303-19.
Cramahé, Lieutenant-Governor, 142.
Croghan, 28.
Crown Lands, 95, 253, 266, 290-1, 295, &c.
Crown Land Funds, 253-5, 290.
Crown Point, Fort, 90, 101, 102, 123, 124, 161, 163, 167, 173,
185.
Cumberland, Fort, 19.
Customs Arrangement, 270-1.
Cuyler, Lieutenant, 15, 16.
Dalhousie, Lord, 278.

Dalyell, Captain, 17, 18 and n., 20.
D’Anville, 49.
Dartmouth, Lord, 104, 124, 135.
Dayton, Fort, 154, 157, 186.
Dead river, 109.
De Barras, 200.
De Grasse, Admiral, 127, 199-201.
Delaware river, 59, 132, 133, 139.
Delawares.
See Indians.
De Puisaye, Count Joseph, 230-2.
De Rochambeau, 198-200.
D’Estaing, Admiral, 184, 196.
Detroit, 9, 12-18, 20, 23, 25, 28, 225, 238, 245, 247, 284, 286.
Detroit river, 12, 14, 15, 16, 232, 275.
Diamond Island, 173.
D’Iberville, 49.
Dorchester, Lord.
See Carleton.
Drummond, Gordon, 147.
Du Calvet, 190 and n.
Dundas, 240 n., 265, 266, 267, 274, 276, 281, 284, 285.
Dundas Street, 274.
Dunmore, Lord, 221.
Dunn, Thomas, 298.
Dunning, 82.
Duquesne, Fort.
See Pittsburg.
Durham, Lord, 205, 248 n., 253, 260, 271, 279, 316.
Dutchman’s Point, 239.
Eastern Townships, 308.

East Florida.
See Florida.
Ecorces river, 14.
Ecuyer, Captain, 20.
Edge Hill, 21, 22, 26.
Education, 296-7.
Edward, Fort, 146, 164-8, 169, 172, 174, 175, 179-81.
Egremont, Lord, 5.
Elphinstone, Admiral, 304.
Erie.
See Presque Isle.
Erie, Lake, 5, 9, 11, 12, 14, 15, 18, 23, 83, 84, 233-4, 275, 282,
284, 286.
Etherington, Captain, 16.
Eutaw Springs, 199.
Executive Council.
See Council.
Famars, 274.
Fees and Perquisites, 92, 193, 194, 280-1.
Ferguson, Major, 198.
Finlay, Hugh, 248 n.
Firth, 316.
Fishing Rights, 3, 80-1 and n.
American, 211, 264.
French, 1.
Fish Kill Stream, 180, 181.
Florida, 1, 5, 27, 28, 189, 190, 196, 223.
Forbes, General John, 12, 17, 18, 19, 20, 51.
Forster, Captain, 119 and n., 120, 121.
Fox, 87, 117, 128, 151, 160, 201, 216, 217, 219, 243, 244, 252,
262, 267, 287.
France, Declaration of War, 282.
Francis, Colonel, 164.
Franklin, Benjamin, 59, 122, 201, 204, 208, 227, 258.
Franklin, William, 59, 212.
Fraser, General, 164, 170, 176-8, 180.
Frazer, Captain, 171.
Freehold Court House, 196.
Freeman’s Farm, 176, 180 n.
French Canadians, 24, 60, 67 n., 75-8, 81, 91-100, 247, 249, 293-
7, 310-12, 317-18, &c.
French Creek, 9, 12.
French designs on Canada, 300-2.
French Intervention, War of Independence, 184.
French Royalists Settlement, 230-2, 232 n.
French Rule in Canada, 8-10, 39, 64-6, 141, 252, 294.
Frontenac, Count, 8, 147, 185, 288.
Frontenac, Fort, 9, 24, 225.
Gage, General, 4, 23, 25, 63, 64, 90, 95, 96, 97, 104, 107, 125,
126, 131, 190.
Gananoque river, 275 n.
Gansevoort, Colonel, 153.
Gaspé Peninsula, 2, 224.
Gates, General, 124, 172, 174, 175, 180 n., 181, 182, 197, 198.
General Assemblies.
See Assemblies.
Genet, 282, 283.
George, Fort, 90, 101, 122, 166, 188, 272.
George, Lake, 52 n., 58, 102, 162, 163, 166, 167, 173, 174, 187.
Georgia, 1, 196, 222.
Germain, Lord George, 124, 125, 131, 135-41, 152, 158, 165, 172,
173, 182, 190, 191, 195, 201, 215, 217.
German Flatts, 154-5, 186.
German Regiments, 37, 122, 133, 134, 138, 152, 162, 169, 176,
178.
Germantown, 134.
Gibraltar, 69, 201.
Gladwin, Major, 14, 15, 17, 23, 25.
Glenelg, Lord, 279.
Glengarry County, 229.
Gloucester, 199.
Gore, Francis, 316.
Grand river, 233, 234, 235 n.

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IT’S MORE THAN COUNTING PEANUTS

Beyond the Lecture

Reading Assignment: Unpacking the Definition of GDP (LO 7.1)

Writing Assignment: Unpacking the Definition of GDP (LO 7.1)

Reading/Writing Assignment: Data Challenges (LO 7.6)

1. Which of the following is NOT included in GDP? [LO 7.1]

Solutions to End-of-Chapter Questions and Problems

6. Determine whether each of the following counts as consumption, investment, government

b. A taxicab ride is a service, so it is counted as consumption.

Answer: The value-added approach determines the value of a good or service by

Problems and Applications

5. Using Table 7P-2, calculate the following. [LO 7.2, 7.3]

d. Someone buys a new Toyota car produced in Japan.

9. Assume Table 7P-4 summarizes the income of Paraguay. [LO 7.3]

experiencing significant growth, so they are clearly not in recession. Argentina is a

c. GDP-plus = GDP + home production + underground economy + environmental

‘continued Westward along the said forty-ninth parallel of North

the United States. It was the year in which the

between British and Russian possessions possessions in

Dalhousie, Lord, 278.

Eastern Townships, 308.

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