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:

“..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.”[1]

The “structural fiscal deficit” 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 “Funds that Finance Investment” 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 “the economy is expanding at a slower pace, but one that has so far defied predictions of a sharper slowdown.”[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. “Consumers are spending more at their local shopping malls”

b. “A sampling of confidence among home builders rose in December.”

c. “Less oil will be purchased from abroad.”

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/annu…
(pg. 15) and use the information in “Exhibit 7: Food on the Go” to fill in the rows labeled “Cost in minutes of work”. (Cox, Michael W. and Alm, Richard. “Time Well Spent: The Declining Real Cost of Living in America.” Federal Reserve Bank of Dallas 1997 Annual Report )

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

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