1. What components of GDP (if any) would each of the following transactions affect? Explain.
  2. A family buys a new refrigerator.
  3. Aunt Jane buys a new house.
  4. Ford sells a Thunderbird from its inventory.
  5. You buy a pizza.
  6. California repaves Highway 101.
  7. Your parents buy a bottle of French wine.
  8. Honda expands its factory in Marysville, Ohio.
  9. GDP does not include the value of used goods that are resold. Why would including such transactions make GDP a less informative measure of economic well-being?
  10. If prices rise, people’s income from selling goods increases. The growth of real GDP ignores this gain, however. Why, then, do economists prefer real GDP as a measure of economic well-being?
  11. One day Barry the Barber, Inc., collects $400 for haircuts. Over this day, his equipment depreciates in value by $50. Of the remaining $350, Barry sends $30 to the government in sales taxes, takes home $220 in wages, and retains $100 in his business to add new equipment in the future. From the $220 that Barry takes home, he pays $70 in income taxes. Based on this information, compute Barry’s contribution to the following measures of income:
  12. Gross Domestic Product.
  13. Net national product.
  14. National income.
  15. Personal income.
  16. Disposable personal income.
  17. Suppose that the residents of Proteinland spend all of their incomes on ham, chicken, and roast beef. In 2006, they buy 50 pounds of ham for $150, 35 pounds of chicken for $140, and 100 pounds of roast beef for $500. In 2007, they buy 35 pounds of ham for $140, 50 pounds of chicken for $200, and 100 pounds of roast beef for $600.
  18. Calculate the price of each meat in each year.
  19. Using 2006 as the base year, calculate the CPI for each year.
  20. What is the inflation rate for 2007?
  21. Suppose that people consume only 3 goods, as shown in this table:

Tennis ballsGolf ballsBottles of Gatorade

2006 price$2$4$1

2006 quantity100100200

2007 price$2$6$2

2008 quantity100100200

  1. What is the percentage change in the price of each of the three goods?
  2. Using a method similar to the consumer price index, compute the percentage change in the overall price level.
  3. If you were to learn that a bottle of Gatorade increased in size from 2006 and 2007, should that information affect your calculation of the inflation rate? If so, how?
  4. If you were to learn that Gatorade introduced new flavours in 2007, should that information affect your calculation of the inflation rate? If so, how?