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INSTRUCTOR’S MANUAL
CHAPTER 10
GROSS DOMESTIC PRODUCT AND
ECONOMIC GROWTH
CHAPTER GOALS
This chapter deals with gross domestic product and economic growth. After reading this chapter, students should be able to:
•Discuss the nature of gross domestic product and how it is calculated.
•Distinguish between nominal gross domestic product and real gross domestic product.
•Describe the factors that underlie a nation’s rate of economic growth in the long run.
•Identify the possible reasons for the slowdown in U.S. productivity.
•Discuss the possible policies that government might enact to speed up economic growth.
•Analyze the economic growth policies of the East Asian countries.
LECTURE HINTS AND IDEAS
This chapter is devoted to GDP and related issues. It starts with a description of what is and is not included in GDP, and then moves on to detail each of the GDP components. Reasons are given for why GDP is not necessarily a good measure of a society’s well-being. Then the importance and calculation of real GDP is covered. Finally, the reasons for economic growth are detailed, with coverage of creative destruction, new economy, and e-commerce issues.
This chapter gets students thinking about how to measure the economy’s output and why this is important in macroeconomics. When talking about the components of GDP and real GDP in class, it is useful to have the real figures available from Tables 10.1 and 10.2. This helps students to realize that this is not just an abstract exercise—economists do estimate these components. During the class discussion of economic growth, you may wish to bring back the production possibilities curve analysis from Chapter 1 to reinforce the concepts presented in this chapter.
BREAK-THE-ICE DISCUSSION STARTERS
1.“What would happen to the value of GDP if we were to include the value of volunteer services? Should this be done? How about the value of housework?” Measured GDP would increase, but not in a consistent way, since there is no market value attached to these services.
2.“There is a market for marijuana, with its own demand and supply and market equilibrium price. So why isn’t marijuana included as a consumption good in the calculation of GDP?” It is part of the underground economy, and there is no good way to estimate the total market value in a given year.
3.“Is increased economic growth always desirable for a country?” Although economic growth brings more goods and services, and thus the potential to make people better off, it also can bring additional pollution, congestion, and faster depletion of nonrenewable resources. Also, the distribution of income should be considered.
4.“If we allow increased immigration, we will have more workers, so we can produce more output and GDP will go up. So why not have a completely open-door immigration policy in the U.S.?” Students may at first point to unemployment, but this would likely be a short-term adjustment problem. The real issue is that we need to consider GDP per person. If many of the immigrants are consumers, but not workers (children, elderly), then GDP per person may fall even if GDP is rising. Living standards would fall.
- “How could lower interest rates help to speed up a country’s economic growth?” Increases in investment and the development of new technology would be encouraged. More people could take out loans to go to college to improve their human capital.
- “How are computers and the Internet changing the U.S. economy?” This question encourages thought about a wide range of topics, including consumer and business purchases over the Internet, banking, advertising, information, workplace issues, and so on. The discussion can lead into the New Economy theory.
BRIEF ANSWERS TO STUDY QUESTIONS AND PROBLEMS
1.a.Not part of GDP
b.Part of GDP
c.Not part of GDP
d.Part of GDP
e.Not part of GDP
f.Part of GDP
g.Not part of GDP
h.Part of GDP
i.Part of GDP
2.GDP equals $1,145 billion.
3.Real GDP equals $6,559 billion, $6,248 billion, $6,244 billion, $6,224 billion, and $6,294 billion.
4.A reduction in the average workweek would likely decrease national output and thus decrease GDP. However, the quality of life for workers might increase because of increased leisure.
5.a.Nominal GDP equaled $4,000 billion in 1999 and $5,700 billion in 2000.
b.Real GDP for 2000 equaled $4,800, using 1999 as the base year.
c.Real GDP for 1999 equaled $4,750, using 2000 as the base year.
6.Changes in nominal GDP do not account for changes in the economy’s price level, while changes in real GDP do.
7.The GDP deflator equals 112.48.
8.The GDP figure indicates there was a $9,650 billion market value of all final goods and services produced within the United States in that year.
9.Removing a trade restriction would encourage economic growth by bringing more productive inputs into the home country.
10.Nations that save the most also tend to invest the most, and investment has been strongly correlated with productivity.