MEASURING GDP AND ECONOMIC GROWTH

1. Stanford Economics Professor Ronald McKinnon suggested the following strategies for reducing the large current account deficit in the United States:

ì..the first order of business in correcting the trade deficit is to reduce the structural fiscal deficit of the U.S. and possibly run with surpluses.

The second order of business is to provide incentives possibly

tax incentives for

American households to increase their saving.î[1]

The ìstructural fiscal deficitî refers to the government budget deficit. So Professor McKinnon is saying we should reduce the government budget deficit, and

increase household saving as well. Use the identity derived in the ìFunds that Finance Investmentî section of the chapter 24 (p. 570) to explain how these

policies would reduce the current account deficit.

2. In January, 2007, the New York Times reported that the latest data available indicates that ìthe economy is expanding at a slower pace, but one that has so

far defied predictions of a sharper slowdown.î[2]. The article mentions several reasons for the growth in GDP. For each of the contributing factors cited below,

indicate which component of GDP (consumption, investment, government expenditure, or net exports) was affected and in which direction:

a. ìConsumers are spending more at their local shopping mallsî

b. ìA sampling of confidence among home builders rose in December.î

c. ìLess oil will be purchased from abroad.î

3. The discussion of real GDP in the chapter points out that inflation distorts our perception of how the cost of living changes over time. As a measure of cost,

the number of hours of work required to buy an item is a much more meaningful yardstick than the money price. The table below gives the money prices of

popular snacks in 1964, 1974, 1984, and 1997. Go to the website of the Federal Reserve Bank of Dallas

http://www.dallasfed.org/assets/documents/fed/annual/1999/ar97.pdf

(pg. 15) and use the information in ìExhibit 7: Food on the Goî to fill in the rows labeled ìCost in minutes of workî. (Cox, Michael W. and Alm, Richard. ìTime

Well Spent: The Declining Real Cost of Living in America.î Federal Reserve Bank of Dallas 1997 Annual Report )

Snacks 1964 1974 1984 1997

Soft Drink $0.16 $0.22 $0.28 $0.33

Cost in minutes of work

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Candy Bar $0.05 $0.10 $0.30 $0.45

Cost in minutes of work

Gum $0.05 $0.11 $0.18 $0.25

Cost in minutes of work

Chips $0.15 $0.25 $0.35 $0.50

Cost in minutes of work

[1] ìThe Worth of the Dollar,î by Ronald McKinnon, Wall Street Journal. (Eastern edition). New York. N.Y.: Dec. 13, 2006, pg. A. 18

[2] ìSome Signs of Economic Resilience Seen,î by Jeremy W. Peters, New York Times, January 18, 2007.

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