Chapter 1 Homework

McKenna Davidson

Pacific University

Economics 101: The Economics of Social Issues

Homework #1: Problems from Chapter 4

Due Wednesday, September 3

1. In what way does the reliance on market values to measure production understate gross domestic product in the United States? Carefully explain.

(Reliance on market value to measure production understates GDP in the U.S because although many different goods and services are sold in markets, some are not. For example, the unpaid work of a homemaker is an economic value but it is not sold in markets and therefore is not counted in GDP. So, because we aren’t taking into consideration all of the goods and services offered, GDP in the U.S is understated.

2. A large part of the agricultural sector in developing countries consists of subsistence farming, in which much of the food that is produced is consumed by the farmer and the farmer’s family. Discuss the implications of this fact for the measurement of GDP in poor countries.

(

3. Purchases and sales of financial assets take place in markets. Why aren’t they included in GDP calculations?

(Although purchases and sales of financial assets take place in markets, they are not included in GDP calculations because GDP only measures the final goods and services produced in a country during a given period. Assets are resources owned by the company.

4. The economy of Neverland experienced a 7% increase in nominal GDP last year. The population remained unchanged, there was no environmental degradation involved in production, and no “bads” were produced. Is the economy better off in terms of goods and services it’s able to consume? If yes, explain why. If no, explain why. If unsure, explain why. Answers that are not carefully supported will receive no credit.

(I think that the economy would be “no better off.” If prices increase and quantity stays the same, NGDP can still increase but have no effect on the economy.

5. Any economy...