Answer for Homework 1: Modern Macroeconomics I

1. Answer the following questions.
(a) What is GDP?
Answer GDP is the gross sum of the value added of each product measured
by market prices in a country during a period.
(b) GDP includes the imputed rent on owner-occupied houses. But, the ownerof a house must buy it before owing. It has been already priced. Isn’t it
double counting? What is your answer to this question?
Answer The answer is no. When the owner buys new house, the value ofthe house is added in that year’s GDP. While the owner does not pay
a landlord for housing service, we can interpret that the owner enjoys
housing services served by himself. GDP includes the rent that houseowners pay to themselves. Since the housing service and the original
purchase create two di¤erent values, both values should be included inGDP. Therefore, there is no double counting.
(c) The total expenditure in a country is said to be equal to the total incomein the country. But, if a company cannot sell many products this year, thestatement seems to be wrong. Why is the previous statement true in GDP
accounting?
Answer If a company cannot sell part of products, two cases happen. Theproduct is spoiled and need to be thrown it away. Then it does notproduce any value. So it is not counted as part of GDP. But if we canstore the product and sell during the next period, it produces additional
value during the next period. In this case, National Income Accounting
system treats the inventory as the sale of goods to themselves during thisperiod. Hence it is counted as part of GDP of this period. When theproduct is sold during the next period, it can be seen as the transfer ofused goods from the …rm to consumers. Hence it does not a¤ect GDPof the next period. Because of this treatment of inventories, all goods
produced are purchased by somebody. Therefore, total income always
equals total expenditure in a country.
I thank to Hiroshi Kitamura who made these sample answers.

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(d) If we add the market value of all goods or services produced in Japan in 2004,
is it equal to Japanese GDP in 2004? Explain your answer.
Answer GDP is the gross sum of the value added of each product measured
by market prices in a country during a period. Hence, if we add themarket value of all goods and services, the value of intermediate goods
would join in GDP. Therefore answer of this problem is no.
(e) Is inventory a part of GDP? Explain the logic of your answer?
Answer If a good can be stored and sold during the next period, National
Income Accounting system treats the inventory as the sale of goods tothemselves during this period. It is counted as part of GDP of this period.
(f) What is a di¤erence between GDP and GNP?
Answer GDP measures the total income in a country not by residents of thecountry.
GNP = GDP + factor payments from abroad

factor payments to abroad :(g) What is a di¤erence between GNP and NNP?
Answer The main di¤erence between GNP and NNP is whether to subtract
the depreciation of capital or not. More precisely,
NNP = GNP

Depreciation(h) What is a di¤erence between real GDP and nominal GDP? Why do we needto examine real GDP to understand a change in the standard of living?
Answer Nominal GDP uses current prices to measure the value of goods andservices. On the contrary, real GDP uses prices of based year to do it.
Because if there exist price ‡uctuation, GDP can not be a suitable measure of economic well-being. Therefore we need to eliminate the impactof price ‡uctuation.
(i) Why do some researchers think that GDP per worker is the better measure ofrichness than GDP per capita in order to compare income di¤erences acrosscountries?
Answer Many industries are not developed in a developing countries: restaurants, maintenance of machine etc. Since GDP can not measure the valueof home production, GDP per capita may underestimate well-being of developing countries. Since GDP does not value home production, it may
be reasonable to divide it by the number of labor force.
(j) What is the consumer price index?
Answer Consumer price index is the price of a basket of goods and services
purchased by a typical consumer relative to the price of same basket in2

some base year. Let 2006 be the base year. Then, the CPI is de…ned asfollows:
CPI in 2006 = 1PN
Number of product iPrice of product i in 2007;
CPI in 2007 = Pi=1
N
Price of product i in 2006
i=1 Number of product i

where the number of product i represents the number of product purchased by the typical consumer. There are three di¤erences between twoindexes.
(k) How is a GDP de‡ator estimated? How is a consumer price index estimated?
Explain the di¤erence between two indices.

Answer GDP de‡ator is the ratio of nominal GDP to real GDP and is de…ned
asNominal GDP
GDP de ator =Real GDP
1 The GDP de‡ator measures the price of all goods and services produced; CPI measures the prices of only the goods and services boughtby consumers.
2 The GDP de‡ator includes only goods produced in a country. It
excludes imported goods. CPI includes imported goods if consumers
buy the goods.
3 The CPI assign …xed weights to the prices of di¤erent goods; the GDPde‡ator allows the basket of goods to change over time as the composition of GDP changes.
(l) How is an unemployed worker de…ned?
Answer People who are older than 16 years are called unemployed when
1 They don’t have a paid job.
2 They conducted a job seeking activity.
3 If there is a job, they can do it soon (They are available).
Therefore, unemployed means that they don’t involuntary have a job.
(m) What is the labor force participation rate?
AnswerLabor force participation rate =labor force
adult population

100:

The labor force participation rate is the percentage of adult population(16 years and older) that is in the labor force.
(n) Explain a di¤erence between the unemployment rate and the labor force participation rate.

3Answer The de…nitions of each rate are respectively,
Unemploymentrate =number of unemployed persons
labor force

Labor force participation rate =laborforce
adultpopulation

100; and100:

The unemployment rate is the percentage of labor force who is unemployed. People is unemployed when they do not have a paid job, they
conducted a job seeking activity, and if there is a job, they can do it soon.
On the other handthe labor force participation rate us the percentage ofadult population (16 years and older) that is in the labor force.

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