AP_Krugman_Textbook

Summary 151

Section 3 Summary

Government purchases of

goods and services = $150 Government borrowing = $60

Consumer

spending = $510

Imports = $20

Exports = $50

Wages, profit,

interest,

rent = $800

Gross

domestic

product

Investment

spending = $110

Wages, profit,

interest,

rent = $800

Borrowing and

stock issues by

firms = $110

Foreign borrowing

and sales of stock = $130

Foreign lending and

purchases of stock = $100

Government

Households

Taxes = $100 Government transfers = $10

Private savings = $200

Markets for goods

and services

Financial

markets

Factor

markets

Firms

Rest of world

3.The components of GDP in the accompanying table were pro-
duced by the Bureau of Economic Analysis.

a.Calculate consumer spending.

b.Calculate private investment spending.

c.Calculate net exports.

d.Calculate government purchases of goods and services and

investment spending.

e.Calculate gross domestic product.

f.Calculate consumer spending on services as a percentage of

total consumer spending.

g.Calculate exports as a percentage of imports.

h.Calculate government purchases on national defense as

a percentage of federal government purchases of goods

and services.

4.The small economy of Pizzania produces three goods (bread,

cheese, and pizza), each produced by a separate company. The

bread and cheese companies produce all the inputs they need

to make bread and cheese, respectively. The pizza company

uses the bread and cheese from the other companies to make

its pizzas. All three companies employ labor to help produce

their goods, and the difference between the value of goods sold

and the sum of labor and input costs is the firm’s profit. The

accompanying table summarizes the activities of the three

companies when all the bread and cheese produced are sold to

the pizza company as inputs in the production of pizzas.

Components of GDP in 2009

Category (billions of dollars)

Consumer spending

Durable goods $1,034.4

Nondurable goods 2,223.3

Services 6,835.0

Private investment spending

Fixed investment spending 1,747.9

Nonresidential 1,386.6

Structures 480.7

Equipment and software 906

Residential 361.3

Change in private inventories –125.0

Net exports

Exports 1,560.0

Imports 1,950.1

Government purchases of goods and

services and investment spending

Federal 1,444.9

National defense 779.1

Nondefense 365.8

State and local 1,788.4

Bread Cheese Pizza

company company company

Cost of inputs $0 $0 $50 (Bread)

35 (Cheese)

Wages 15 20 75

Value of output 50 35 200

2.A more complex circular-flow di-
agram for the economy of
Macronia is shown at right.
a.What is the value of GDP in
Macronia?
b.What is the value of net
exports?
c.What is the value of dispos-
able income?
d.Does the total flow of money
out of households—the sum
of taxes paid, consumer
spending, and private
savings—equal the total flow
of money into households?
e.How does the government fi-
nance its spending?