CHAPTER 8: Measures of Economic Activity

1a. the income-based estimate of GDP = wages and salaries (546) + corporate
profits (55) + interest income (43) + proprietors' incomes and rents (56) +
indirect taxes (75) + depreciation (79) = $854 billion
the expenditure-based estimate of GDP = personal consumption (490) + gross
investment (157) + government purchases (184) + net exports [exports (68) imports (27)] = $872 billion
b. Given the $18 (= $872 - $854) billion statistical discrepancy between the
income-based and expenditure-based GDP estimates in part a, half this amount
($9 billion) is added to the lower income-based estimate ($854 billion) and
half this amount is subtracted from the higher expenditure-based estimate
($872 billion), so that each gives a single GDP value of $863 billion.
c. Because net investment is $78 (= $157 - $79) billion, Metrica's capital
stock is expanding by this amount in 2009.
d. Metricas GNP is found by deducting its net investment income to the rest
of the world ($8 billion) from GDP ($863 billion), giving a GNP of $855 (=
$863 - $8) billion.
2. So that final and intermediate products are not double counted (which would
lead to a total value of $6.35), only the extra worth of the salmon at each
stage of production is included in GDP. This extra worth is calculated by
subtracting the cost of materials from the value of the businesss output. In
the first stage of production, the value added by the fisherman is total value
of the salmon sold to the food processor ($1.40). In the second stage, the
value added by the food processor is $0.80, and in the third stage, the value
added by the retailer is $0.55. The total value added in all three production
stages ($2.75) therefore equals the value of the final product.
3a. A movie-theatre ticket is always a final product since it cannot be
resold.
b. A roll of newsprint is always an intermediate product, since this product
is always processed further.
c. Electrical power, since this is a final product if used by a household and
an intermediate product if used by a business.
4a. included in GDP, because it is consumption spending
b. excluded from GDP, because it is an interest payment on government debt
c. included in GDP, because it is investment spending
d. excluded from GDP, because it is part of the underground economy
e. excluded from GDP, because it is a transfer payment
f. included in GDP, because it is a government purchase
g. included in GDP, because it is investment spending
h. excluded from GDP, because it is a second-hand purchase

Copyright 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

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i. excluded from GDP, because it is a government subsidy

j. included in GDP, because it is an export
k. excluded from GDP, because it is a financial exchange
l. excluded from GDP because it is a nonmarket activity
5a. Since the decline in living standards provided by leisure does not appear
in GDP, the change in living standards is overstated.
b. Because the rise in living standards associated with the growth of this
sector is left out of GDP, the change in living standards is understated.
c. The drop in living standards that occurs because of the less equitable
distribution of income is not captured in GDP, so the change in living
standards is overstated.
d. The growth in living standards associated with increasing environmental
sustainability is missing from GDP, which means that the change in living
standards is understated.
6.Because the cleanup of the spill used scare economic resources (which could
have been used for a variety of other purposes) and increased welfare (given
that the spill happened and had to be dealt with), most economists would argue
that the clean-up of the spill should be included in GDP calculations. Critics
would argue that, because the clean-up expenditures were simply reversing the
decline in welfare that occurred due to the spill, they should not be included
in GDP.
7.

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FIGURE 8A1 Financial Markets, Government, and the Rest of the World in the Circular Flow

Internet Application Question

1a. Answers are found in links to 'Summary Tables', 'Tables by subject',
'Economic accounts', 'Gross domestic product', and 'Gross domestic product,
expenditure-based'.
b. Answers are found in the same links as in part a.
2a. Answer found in links to 'Data', 'Gross Domestic Product', and '8637'
(Purchasing Power Parities, United States Dollars per Canadian Dollar, ICP
Classification (Consumption-Based)). Click on 'Ann 1981-00-00 D23413 Gross
Domestic Product ($US/$Can)'. Then click on 'Go' and 'Go'. Under 'Output
Format' click on '2D Line Graph'. Then press 'Go'. You can print out the
resulting graph.

Copyright 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

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b. 3a. Answers are found in links to 'Summary Tables', 'Tables by subject',

'Economic accounts', 'Gross domestic product', and 'Gross domestic product,
income-based'.
b. 4. -

ANSWERS TO QUESTIONS AT END OF 'ADDING THE HUMAN DIMENSION'

1. For example, per capita income fails to take full account of differences in
the quality of products sold in various countries, average life expectancy
ignores possible discrepancies in the lifespans of rich and poor citizens in
any country, while the rate of adult literacy is a statistic that can have a
wide margin of error, since literacy is so difficult to define adequately.
Educational attainment (as shown by the percentage of youth enrolled in
school) ignores the differences in the quality of schooling in different
countries.
2. For example, the United Nations Development Programme provides a measure of
poverty known as the human poverty index (HPI) for various countries. Rather
than measure living standards by income, the HPI uses indicators of the most
basic dimensions of deprivation: a short life (measured by the percentage of
people expected to die before the age of 40), a lack of basic education
(measured by the percentage of adults who are illiterate) an lack of access to
public and private resources (measured by three variables, including the
percentage of people with access to health services and to safe water, and the
percentage of malnourished children under five). There are other measures of
living standards that focus on gender disparities.
3. As outlined in the analytical summary as well as the most recent year's
report, the HDI sets a minimum and a maximum for each variable and then shows
where each country stands in relation to these scales, expressed as a value
between 0 and 1. For example, the adult literacy rate (which is weighted at
two-thirds in the knowledge component of the index) has a minimum ob 0% and
the maximum of 100%. So the literacy component of knowledge for a country
where the literacy rate is 75% would be 0.75. Similarly, the mean years of
schooling (which is weighted at one-third in the knowledge component of the
index) is measured by enrollment in primary, secondary and tertiary schools
for the appropriate age groups, with the minimum again being 0% and the
maximum at about 100%. The minimum for life expectancy is 25 years and the
maximum 85 years, so the longevity component for a country where life
expectancy is 55 years would be 0.5. Finally, for income the minimum is $200
(PPP) and the maximum is $40,000 (PPP). Income above the average world income
is adjusted using a progressively higher discount rate. The scores for the
three dimensions (with literacy and schooling combined in a single knowledge
component) are then averaged in an overall index.

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