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Macroeconomics 1CE
Karlan/Morduch/Alam/Wong
Instructor’s Manual
CHAPTER 7
Measuring the Wealth of Nations
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 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 Justify 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 list the categories of
spending that are included in the expenditure approach.
LO 7.4 Explain the difference between real and nominal GDP, and calculate the GDP deflator.
LO 7.5 Calculate and explain the meanings of GDP per capita and the real GDP annual growth
rate.
LO 7.6 Discuss some limitations to GDP, including its measurement of home production, the
underground economy, environmental degradation, and well-being.
Chapter Outline
IT’S MORE THAN COUNTING BERRIES
Karlan 1CE Instructor’s Manual: Chapter 7

Copyright © 2017 McGraw-Hill Education. All rights reserved.
7-1
Macroeconomics 1CE
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
Using GDP to Assess Economic Health (LO 7.5)
Limitations of GDP Measures
Data Challenges (LO 7.6)
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 Statistics
Canada. 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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Macroeconomics 1CE
Class Discussion: Data Challenges (LO 7.6)

Have students view this brief clip from The Colbert Report. In the clip, Colbert discusses
individuals who live off of the garbage of others. Discuss the following:
1. How would the consumption of another person’s garbage impact GDP?
2. How well does GDP measure well-being? What issues does GDP miss?
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.
Solutions to End-of-Chapter Questions and Problems
Review Questions
1. Canadian 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 used 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: When economists calculate GDP, they are able to make this comparison by
converting production to its dollar value. If the economy produces 10 apples selling at $1.50
each and 5 oranges selling at $1 each, the economy has produced (10 x 1.50) + (5 x 1) = $20
of economic production. The economist has now compared apples and oranges.
3. When Canadians buy goods produced in the U.S., Americans earn income from Canadian
expenditures. Does the value of this American output and Canadian 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 the U.S. count in the U.S. GDP even if they are consumed in Canada.
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]

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Macroeconomics 1CE
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 2013, the average baseball player earned $3.4 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
government).
f. A company’s purchase of foreign minerals.
Answer:
1. 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.
2. A taxicab ride is a service, so it is counted as consumption.
3. The purchase of a taxicab by the company is an investment.
4. The purchase of a textbook counts as consumption.
5. Neither: Trading financial investments is considered a transfer of ownership, which does
not go into the calculation of GDP.
6. 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]

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Macroeconomics 1CE
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 price of intermediate outputs (i.e., outputs that
will in turn be used in the production of another good) and subtracting the cost of producing
each one. In this way, only the value that is added at each step (the sale value minus the
value 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 $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
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Macroeconomics 1CE
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 7.4]
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 nominal 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, 7.5]
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 2013, according to the International Monetary Fund, India had the world’s 10th-highest
nominal GDP, the 140th-highest nominal GDP per capita, and the 43rd-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 7.5]
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 140th 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 43rd highest GDP
growth rate means that the standard of living in India is rising moderately 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 7.6]

7-6
Macroeconomics 1CE
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 university 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 7.6]
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 which 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
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 price of inputs minus the price of outputs), what is
the contribution of this shirt to GDP?
7-7
Macroeconomics 1CE
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. The cotton farmer’s contribution is $1.10 − $0, or $1.10. The fabric maker’s contribution
is $3.50 − $1.10, or $2.40. The sewer and printer’s contribution is $18.00 − $3.50, or
$14.50. Using the value-added method (i.e., summing the value-added by producers at
each step of the production process, equal to the price of inputs minus the price of
outputs) the total contribution of this shirt to GDP is the sum of these three values-added:
$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 Canadian 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).
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?
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Macroeconomics 1CE
Answer: The expenditure method to 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.
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%.
b. 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 Edmonton authorizes the construction of a new arena using public funds.
b. A student pays rent on her apartment.
c. Parents pay university tuition for their son.
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 Canada.
g. A family buys a house in a newly constructed housing development.
h. The Canadian Armed Forces pays its soldiers.
i. A Brazilian driver buys a Ford car produced in Canada.
j. The Department of Transportation buys a new machine for printing driver’s licenses.

7-9
Macroeconomics 1CE
k. An apple picked in British Columbia in October is bought at a grocery store in Ontario in

December.
l. Hewlett-Packard produces a computer and sends it to a warehouse in another province for
sale next year.
Answer:
a. G. The stadium is a government purchase.
b. C. The student is consuming housing services.
c. C. The parents are purchasing education services.
d. NX. 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. C. The person is consuming an automobile.
g. I. New home construction is included in GDP as residential investment.
h. G. The government is spending on national defense services.
i. NX rise for Canada. In Brazil, NX fall and C rises, leading to no net change in the
Brazilian GDP.
j. G. The government is spending money on goods and services.
k. C. The apple is produced and consumed in Canada increasing C.
l. I. 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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Macroeconomics 1CE
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?
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 shows the prices of the inputs and outputs for the production of a road bike. [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?
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Macroeconomics 1CE
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.
b. $20 = ($30 – $20) × 2.
c. $100 = $250 – ($80 + $70).
d. $40 = $350 – [$250 + ($30 × 2)].
e. $150 = $500 – $350.
f. $500 = Sum of value added = Value of final good.
11. Imagine that Canada 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 Canada in this three-goods version of its economy.
b. Suppose that a drought hits the province of British Columbia. This drought causes the quantity of
apples produced to fall to 2. Assuming that all prices remain constant, calculate the new Canadian
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 Canadian 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.
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 2010 as the base year. [LO
7.4]
Answer:

7-12
Macroeconomics 1CE
13. Suppose that the British economy produces two goods: laptops and books. The quantity
produced and the prices of these items for 2010 and 2011 are shown in Table 7P-8. [LO 7.4]
a. Let’s assume that the base year was 2010, so that real GDP in 2010 equals nominal GDP
in 2010. If the real GDP in Britain was $15,000 in 2010, 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 2011?
c. Using your answers from parts a and b, what is the real GDP in 2011? What was the
growth rate in real GDP between 2010 and 2011?
Answer:
a. GDP is the sum of the dollar value of the goods and services produced in a country. In
2010, $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 2011 if nominal GDP has
grown 10%. GDP(2011) = GDP(2010) x 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 2010 as the base year, to find real GDP in year 2011, you take the quantities
produced in year 2011 multiplied by the prices in 2010. Real GDP (2011) = 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 2008 and 2009, and the real GDP growth
rate between the two years. Which countries look like they experienced recession in 2008–2009?
[LO 7.5]
Answer: The United States and Germany. 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 U.S. have
negative real GDP growth year over year, indicating that they are both likely experiencing a
recession. Egypt and Ghana are both experiencing significant growth, so they are clearly not
in recession. Argentina is a borderline case. It is experiencing very slow but positive GDP
growth.

7-13
Macroeconomics 1CE
15. Table 7P-10 describes the real GDP and population of a fictional country in 2009 and 2010.
[LO 7.5]
a. What is the real GDP per capita in 2009 and 2010?
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 2009
is $10,000,000,000/1,000,000 = $10,000. The real GDP per capita in 2010 is
$12,000,000,000/1,110,000 = $10,909.
b. Real GDP growth rate = [GDP(2010) - GDP(2009)]/GDP(2009) = (12 - 10)/10 = 0.20 =
20%.
c. Population growth rate = [Pop(2010) - Pop(2009)]/Pop(2010) = (1.1 - 1)/1) = 0.1 = 10%.
d. Real GDP per capita growth rate = [Per capita GDP(2010) - Per capita GDP(2009)]/Per
capita GDP(2009) = ($10,909 – $10,000)/10,000 = 0.0909 = 9.09%
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
7.5, 7.6]
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?

7-14
Macroeconomics 1CE
Answer:
a. GDP = C + I + G + NX. GDP per capita = GDP/population.
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.

7-15
Macroeconomics 1CE
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 7.6]
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
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perfect flower, per diem, till all the blossoms on the spike are exhausted;
which, in this species, are much more abundant than in any of the others. It
is increased by the root or seed.
This plant, we presume, is the same as those specified under the different
titles of Lilium Longiflorum, and L. Japonicum, in Willdenow’s new edition
of the Species Plant.; the L. candidum, and L. Japonicum, of Thunberg’s
Japan; and the L. Longiflorum of the Linn. Trans. Vol. II. P. 333. The
Hemerocallis formerly figured by us, under the specific title of Cærulea, we
take to be, the Hemerocallis Japonica, and Lilium Cordifolium of
Willdenow; the H. Cordata of Thunberg’s Japan; and the Hemerocallis
Japonica, and Lilium Cordifolium of the Linn. Trans. Vol. II. p. 332.
Willdenow, who had never seen even dried specimens of the plants in
question, has hence been led to place the same plant, under different genera;
and to consider the Hemerocallis of the Botanists Repository, as only a
variety of H. Japonica, but still admitting it as an Hemerocallis. Now, as we
have no doubt, (nor do we think any one can, that will take the trouble to
examine the dissections given with each figure,) that if the one is an
Hemerocallis, the other must be admitted of the same family; so, have we
made no scruple in rejecting the generic name of Lilium, for the present
plant; although we would gladly have adopted the specific one of Longiflora,
had not that of Alba, already obtained so generally in our gardens; a rule, for
our direction, paramount to all others as to specific denomination.
PLATE CXCV.
HYPOXIS OBLIQUA.
Oblique-leaved Hypoxis.
CLASS VI. ORDER I.

HEXANDRIA MONOGYNIA. Six Chives. One Pointal.
ESSENTIAL GENERIC CHARACTER.
Corolla sex-partita, persistens, supera. Capsula basi angustior. Spatha

bivalvis.
Blossom six-parted, remaining, above. Capsule narrower at the base.
Sheath two-valved.
See Hypoxis stellata. Pl. CI. Vol. II.
SPECIFIC CHARACTER.
Hypoxis scapo subtrifloro, piloso, longitudine foliorum; pedunculis flore

triplo longioribus; foliis lineari-lanceolatis, oblique flexis, glabris; radice
fibrosa.
Hypoxis with mostly three flowers on the stem, which is hairy, the length
of the leaves; foot-stalks three times the length of the flower; leaves linearly
lance-shaped, obliquely bent downward, smooth; root fibrous.
REFERENCE TO THE PLATE.
1. A Petal of the Blossom, with its Chive, as attached to its base.

2. The Seed-bud, on its foot-stalk, with a part of the tube of the
blossom, to which the Chives are fixed.
3. The Seed-bud, Shaft and Summit, magnified.
This species of Hypoxis is from the Cape of Good Hope; and, we believe,
solely in the possession of G. Hibbert, Esq. Clapham; from whose collection
our drawing was made, in June, this year, 1801. It appears to be a hardy
green-house plant; but, is certainly more curious than handsome, and, from
its general character, we should judge the propagation would be from the
root.
Professor Jacquin has given the Hypoxis Obliqua in his Icones Plantarum
Rariorum, 2. t. 371; and in his Supplement to the Collectanea, 54; but, we
must suppose from a more vigorous specimen than ours; as, the appearance
of a woolly character, at the margin of the leaves, was not to be traced in our
plant, although every other part is exact. Wherefore, we have retained his
name, though we have rejected the latter part of his specific character, to
introduce one, which we consider, of more consequence, as opposed to those
with bulbous roots, this being fibrous.
PLATE CXCVI.
IXIA MACULATA.
Spotted-flowered Ixia.
CLASS III. ORDER I.

TRIANDRIA MONOGYNIA. Three Chives. One Pointal.
Corolla 6-petala, patens, æqualis.

Stamina tria, erectiusculo-patula.
Blossom 6 petals, spreading, equal.
Chives three, upright, spreading.
See Ixia Reflexa, Pl. XIV. Vol. I.
SPECIFIC CHARACTER.
Ixia foliis ensiformibus, glabris, scapo duplo brevioribus; floribus

alternis, sub-spicatis; petalis basi obscuris, ovatis, concavis; stigmatibus
bifidis.
Ixia with sword-shaped, smooth leaves, half the length of the flower-
stem; flowers alternate, rather spiked; petals dark at the base, egg-shaped
and concave; summits two-cleft.
1. The two valves of the Empalement.

2. A Flower cut and spread open, with the Chives in their natural
station.
3. The Pointal complete, with one of the Summits detached and
magnified.
This Ixia has been long cultivated in Britain, so says Millar, &c. but, till
within these few years, we have not seen it in our gardens; perhaps it has
been (like many others) lost to us, and recently introduced with the multitude
of other species, which now decorate our green-houses; either from the Cape
of Good Hope or Holland. It is one of the most desirable of the genus, from
the length of time it continues in flower; which is, at least a month, from the
first flowers beginning to expand. It increases by the bulb, and is to be
cultivated as other common Ixias. Flowers in May or June.
PLATE CXCVII.
NYMPHÆA CŒRULEA.
Blue Water-Lily.
CLASS XIII. ORDER I.

POLYANDRIA MONOGYNIA. Many Chives. One Pointal.
GENERIC CHARACTER.
Calyx. Perianthium inferum, tetraphyllum, magnum, supra coloratum,

persistens.
Corolla. Petala numerosa (quindecem sæpe,) germinis lateri insidentia,
serie plus quam simplici.
Stamina. Filamenta numerosa (septuaginta sæpe,) plana, curva, obtusa,
brevia. Antheræ oblongæ, filamentorum margini adnatæ.
Pistillum. Germen ovatum, magnum. Stylus nullus. Stigma orbiculatum,
planum, peltato-sessile, radiis notatum, margine crenatum, persistens.
Pericarpium. Bacca dura, ovata, carnosa, rudis, collo angustata apice
coronata, multilocularis (decem ad quindecem loculis,) pulpa plena.
Semina plurima, subrotunda.
Empalement. Cup beneath, four leaved, large, coloured above,
permanent.
Blossom. Petals numerous (often fifteen,) placed on the side of the seed-
bud, in more than one row.
Chives. Threads numerous (often seventy,) flat, curved, blunt, short. Tips
oblong, fixed to the margin of the threads.
Pointal. Seed-bud egg-shaped, large. Shaft, none. Summit round, flat,
central, sitting, marked in rays, scolloped at the edge, remaining.
Seed-vessel. Berry hard, egg-shaped, fleshy, rough, narrowed at the
neck, crowned at the top, many-celled (from ten to fifteen cells,) full of pulp.
Seeds many, roundish.
SPECIFIC CHARACTER.
Nymphæa foliis cordato-orbiculatis, senioribus crenatis, lobis acutis

imbricatis, acuminatis; petalis acutis, lanceolatis, cæruleis.
Nymphæa with between heart-shaped and round leaves, the old ones
scolloped, lobes sharp, tiled, and tapered; petals sharp, lance-shaped, and
blue.
1. A Chive.
2. The Seed-bud and Summit.
3. The Seed-bud, cut transversely, to shew the number of cells.
Amongst aquatic or water plants, the Nymphæas are undoubtedly the
most desirable in cultivation; although, we should agree to the exclusion of
N. Nelumbo, &c. now forming a distinct genus in the Sp. Plant. of
Willdenow; taken from Usteri’s Ed. of Jussieu’s Gen. Plant. classed from the
natural characters, under the title of Nelumbium’s. This plant may be kept in
the green-house, or hot-house, in a large tub filled with water and a small
portion of mud at the bottom. It propagates by the root, and the flowers,
which are extremely fragrant, are produced in August, in which month, this
year, our drawing was made, from a large plant in the Hibbertian collection;
but, from an omission in the figure, we were obliged to finish the plate from
a plant, in the collection of J. Vere, Esq. Kensington Gore, still in flower, the
beginning of October. The leaves of this species are most beautifully
scolloped, and near a foot in diameter; but the indentitions are scarcely to be
perceived in the younger; one of which, as we could not introduce the larger,
is shewn on the plate of the natural size.
It is a native of the Cape of Good Hope, and was introduced to the Royal
Gardens, Kew, by Mr. F. Masson, about the year 1792.
PLATE CXCVIII.
BAUERA RUBIOIDES.
Three-leaved Bauera.
CLASS XIII. ORDER II.

POLYANDRIA DIGYNIA. Many Chives. Two Pointals.
GENERIC CHARACTER.
Calyx. Perianthium octophyllum, foliolis persistentibus, acuminatis,

reflexis, dentatis.
Corolla. Petala octo, ovata, concava, patentia, æqualia, calyce majora.
Stamina. Filamenta numerosa, capillaria, corolla breviora, receptaculo
inserta. Antheræ latiusculæ, obtusæ, erectæ.
Pistilla. Germen subovatum, villosum. Styli duo, filiformes, longi, apice
curvati. Stigmata simplicia.
Pericarpium. Capsula subrotunda, pilosa, apice dehiscens, bilocularis,
bivalvis.
Semina plurima, subrotunda.
Empalement. Cup eight-leaved, remaining, leaflets tapered, reflexed, and
toothed.
Blossom. Eight petals, egg-shaped, concave, spreading, equal, larger than
the cup.
Chives. Threads numerous, hair-like, shorter than the blossom, fixed into
the receptacle. Tips broadish, obtuse and erect.
Pointals. Seed-bud nearly egg-shaped, hairy. Shafts two, thread-shaped,
long, curved at the ends. Summits simple.
Seed-vessel. Capsule roundish, hairy, splitting at the top, two cells, two
valves.
Seeds many, roundish.
SPECIFIC CHARACTER.
Bauera foliis ternatis, apice dentatis, sessilibus, oppositis.

Bauera with leaves composed of three leaflets, toothed at the point,
growing close to the stem, and opposite.
1. The Empalement, with the Chives and Pointal.

2. The Chives and Pointal magnified.
3. The Empalement, Seed-bud, Shafts, and Summits, magnified.
4. The Seed-bud cut transversely, with the seeds in the cells,
magnified.
This handsome shrub, a native of Port Jackson, New Holland, was first
raised at the seat of the Hon. the Marchioness of Rockingham, Hillingdon,
Middlesex, in the year 1793; and, from a plant, in the conservatory, still in
flower, this present month November, our drawing was made, at the Nursery,
Hammersmith. It is hardy, although delicate in structure, and flourishes in
the green-house. The stem of the plant from which our figure was taken,
although the oldest in the kingdom, and near six feet high, is scarce the
thickness of a quill at the base, therefore must be supported. The young
shoots and leaves are covered with a slight pile; the smaller branches stand
out at right angles, proceeding from the insertion of the leaves, and the
whole plant has, at first sight, much the appearance of a Rubus. It is
propagated by cuttings, made in the month of March, and put under a small
bell-glass on the heat of a hot-bed; the cuttings should be from the extreme
ends of the young shoots. Sir J. Banks, Bart. P. R. S. &c. from whose natural
genius and love for the science, and by whose fostering and liberal hand to
promote it, the study of Botany has become so general a taste; has named
this genus, in honour of two most eminent Botanical painters, of the name of
Bauer, natives of Germany, and brothers. The one, now under the immediate
patronage of Sir Joseph, as Botanical Painter to his Majesty at Kew; well
known for his superb and excellent coloured engravings of Heaths, &c. in
large folio. The younger considered no less able, engaged under the same
influence, with the other artists, &c. who are now upon the last expedition
for discovery to the South Sea; but not equally known to Botanists, as the
person who accompanied the late Dr. Sibthorpe, on his voyages through
Greece; and whose pencil has produced all those drawings, designed to
decorate and illustrate the famous Flora Græca, preparing for the public,
under the auspices of the intelligent Dr. Smith, P. L. S. &c. &c.
PLATE CXCIX.
CAMELLIA JAPONICA. Var. flo. rubro pleno.
Double red Camellia.
CLASS XVI. ORDER VI. of Schreber’s 6th edit. of Gen.

Plant.
MONADELPHIA POLYANDRIA. Threads united. Many Chives.
Calyx imbricatus, polyphyllus; foliolis interioribus majoribus.

Empalement tiled, many-leaved; the inner leaflets the largest.
SPECIFIC CHARACTER OF VARIETY.
Camellia foliis senioribus basi attenuatis, junioribus rubentibus; petalis
interioribus divaricato-erectis; floribus plenis, rubris.
Camellia with the older leaves tapered at the base, the younger ones
reddish; the inner petals stand upright spreading different ways; flowers
double and red.
Again have we to call upon the indulgence of our Botanical friends for
their sufferance, in a third intrusion on the forms of our own prescription.
But, as we had given the two other varieties of this fine plant; and taking it
for granted, by judging from our own feelings, that a figure of this very
scarce variety would be agreeable to most; that they might be (by
comparison) able to decide upon the difference which does exist, but has
been denied by many, between this, and the Striped Var.; see our figure, Vol.
II. Pl. XCI. It has been thought by most, who have not seen this plant; that it
was but the Striped Var. which had lost its variegation. This is certainly not
the case; for, it stands as distinct from the Striped, as from the White variety;
which may be readily traced, either from the plants themselves, or our
figures; by comparing the specific, or rather differing character we have
assigned to each. The Double red Camellia was introduced about the year
1794 from China, by R. Preston, Esq. Woodford, Essex.
The largest plant now in Europe, of this variety, is in the select and most
valuable collection of the Hon. T. Greville, Esq. Paddington, imported, last
year, from China in the highest perfection. It is propagated by cuttings, or
layers; and delights in a light, sandy loam; with about one-third of the pot,
from the bottom, filled with peat earth. It flowers from November, till
February, in the Hothouse; or from January, till April, if kept in the Green-
house. Our figure was taken, in November, this year, at the Hammersmith
Nursery.
PLATE CC.
MELALEUCA HYPERICIFOLIA.
St. John’s-wort-leaved Melaleuca.
CLASS XVIII. ORDER IV.

POLYADELPHIA POLYANDRIA. Threads in many Sets. Many Chives.
Calyx quinquefidus, semisuperus. Petals quinque. Filamenta multa,

longissima, connata in quinque corpora. Pistillum unum. Capsula
trilocularis.
Cup five-cleft, half above. Petals five. Threads numerous, very long,
united into five bodies. Pointal one. Capsule three-celled.
See Melaleuca ericæfolia, Pl. CLXXV. Vol. III.
SPECIFIC CHARACTER.
Melaleuca foliis oppositis, eliptico-oblongis, uninerviis; floribus

consertis; filamentis longissimis, linearibus, apice radiato-multifidis.
Melaleuca with opposite leaves, eliptic-oblong, one-nerved; flowers
clustered; threads very long, linear, rayed and many-cleft at the top.
1. A flower, natural size.

2. One of the five bundles of Chives, with its petal, to which it is
attached at the base, magnified.
3. The cup, seed-bud, shaft and summit, natural size, the summit
detached and magnified.
About the year 1792 this plant was first raised from seeds, by the late Mr.
William Malcolm, Nurseryman, at Stockwell, Surry; and was, from the very
great resemblance it bears to the St. John’s-worts, so denominated, until it
flowered. It has now become one of the commonest, of what are generally
termed, Botany Bay plants; yet unquestionably ranks with the handsomest
whether for its foliage, form of growth, or flowers, which are of a most
beautiful red-purple, scarcely to be imitated in painting. The singular manner
in which the flower-stem is thrown out, as it were, from the old wood, in a
horizontal direction, is common to many other species of the Genus. It grows
to the height of four or five feet, very erect in every part; is easily increased
by cuttings, and thrives best in peat earth. Although it is said to grow in
swampy grounds in New South Wales, see Linnæan Transactions, Vol. III. p.
279, nevertheless, with us, a dry, or damp situation in the green-house,
appears equally congenial to it. In the month of September 1799, our
drawing was taken at the Conservatory of R. James, Esq. Grosvenor Place.

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Karlan 1CE Instructor’s Manual: Chapter 7

Beyond the Lecture

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

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

Karlan 1CE Instructor’s Manual: Chapter 7

Class Discussion: Data Challenges (LO 7.6)

Reading/Writing Assignment: Data Challenges (LO 7.6)

Solutions to End-of-Chapter Questions and Problems

Karlan 1CE Instructor’s Manual: Chapter 7

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

Karlan 1CE Instructor’s Manual: Chapter 7

Karlan 1CE Instructor’s Manual: Chapter 7

Problems and Applications

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

Karlan 1CE Instructor’s Manual: Chapter 7

k. An apple picked in British Columbia in October is bought at a grocery store in Ontario in

Karlan 1CE Instructor’s Manual: Chapter 7

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

d. What value is added by the bike mechanic?

Karlan 1CE Instructor’s Manual: Chapter 7

Karlan 1CE Instructor’s Manual: Chapter 7

Karlan 1CE Instructor’s Manual: Chapter 7

a. GDP = C + I + G + NX. GDP per capita = GDP/population.

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

Karlan 1CE Instructor’s Manual: Chapter 7

Karlan 1CE Instructor’s Manual: Chapter 7

CLASS VI. ORDER I.

ESSENTIAL GENERIC CHARACTER.

Corolla sex-partita, persistens, supera. Capsula basi angustior. Spatha

Hypoxis scapo subtrifloro, piloso, longitudine foliorum; pedunculis flore

REFERENCE TO THE PLATE.

1. A Petal of the Blossom, with its Chive, as attached to its base.

CLASS III. ORDER I.

ESSENTIAL GENERIC CHARACTER.

Corolla 6-petala, patens, æqualis.

Ixia foliis ensiformibus, glabris, scapo duplo brevioribus; floribus

REFERENCE TO THE PLATE.

1. The two valves of the Empalement.

CLASS XIII. ORDER I.

Calyx. Perianthium inferum, tetraphyllum, magnum, supra coloratum,

Nymphæa foliis cordato-orbiculatis, senioribus crenatis, lobis acutis

REFERENCE TO THE PLATE.

CLASS XIII. ORDER II.

Calyx. Perianthium octophyllum, foliolis persistentibus, acuminatis,

Bauera foliis ternatis, apice dentatis, sessilibus, oppositis.

REFERENCE TO THE PLATE.

1. The Empalement, with the Chives and Pointal.

CAMELLIA JAPONICA. Var. flo. rubro pleno.

Double red Camellia.

CLASS XVI. ORDER VI. of Schreber’s 6th edit. of Gen.

ESSENTIAL GENERIC CHARACTER.

Calyx imbricatus, polyphyllus; foliolis interioribus majoribus.

St. John’s-wort-leaved Melaleuca.

CLASS XVIII. ORDER IV.