Chapter 8

Teaching TipsMeasuring GDPIn recent years Statistics Canada has adjusted its method for calculating GDP using the income approach. No longer is there a separate account for interest income. The flows formerly found there have been distributed to the corporate income account and proprietors' incomes and rents account. The procedure used for applying the expenditure approach has also been adjusted, with spending by non-profit institutions such as trade unions, religious societies and consumer associations now all included in a separate account. This latter adjustment does not fundamentally change the expenditure equation, given that this spending can still be lumped with spending by households as part of consumption.

Purchasing Power ParityGiven their abstract nature, the mechanics of purchasing power parity adjustment are not touched on in the chapter. Instructors wishing to cover the topic can do so by focusing on how the price for a single commodity differs when bought directly in the country's domestic currency, converted into US dollar, versus how much when bought in US dollars in the United States. The best-known application of this single-commodity idea is the Big Mac index, a tongue-in-cheek PPP adjustment that focuses solely on the prices of the Big Mac in countries where it is sold. Developed by The Economist magazine, its most recent values are accessible online at the magazine's website www.economist.com. For example, if a Big Mac bought in Canada by exchanging US dollars for Canadian dollars is priced at US$3 while it has a price of US$4 in the United States, the Canadian dollar is undervalued by 25 percent [= [($3 - $4)/$4] x $100] relative to the US dollar based on purchasing power parity. In practice, the calculation of PPP-adjusted exchange rates is more intricate than this simple example suggests, but this index has the advantage of highlighting the key issue of cost-of-living differences across countries with minimum mathematical complexity.

Gross National Income and Gross National ProductStatistics Canada recently terminated its publication of updates for Gross National Product (GNP). This statistic has been replaced with Gross National Income (GNI), the statistic featured in the chapter. The difference between GNI and GNP is that the transactions subtracted from GDP to derive it have been expanded. For GNP, it was net investment income to the rest of the world which was deducted from GDP; in the case of GNI it is the more broadly defined term net international income to the rest of the world which is deducted. These transactions include not just flows of investment income in and out of Canada, but other forms of cross-border income as well.

Answers to Thinking About Economics QuestionsPage 215: No, if a used car were sold directly by its owner then there would be valued added in the formal economy only if the owner paid for a sale advertisement.

Page 218: If spending on education were included as investment, then Canada’s total capital stock would have to be redefined to include the income-earning potential of education, known as human capital.

Page 221: Because PPP-adjustment raises the value of Canada’s per capita GDP, prices in Canada are lower in the United States. Taking the difference in the price levels in the two countries into account, the actual purchasing power of Canadians’ incomes (as shown by PPP-adjusted per capita GDP) is higher than is apparent from per capita GDP in unadjusted US dollars.

Page 223: Those economists who disagree with broad indicators of well-being, such as the GPI, argue their calculation includes many subjective elements that are open to disagreement. For example, what wage rate should be used to value the unpaid work of homemakers? How valuable is a relatively equitable distribution of income to society as a whole? And what monetary value should be attached to “natural capital” such as forests and the marine environment?

Answers to Chapter Problems8.1 Practice Problems

1. a. A purchase of used goods is excluded from GDP since it has already been counted when it was first sold, and so is part of none of the components of GDP.b. An addition to inventories is included in GDP and appears as part of the expenditure component investment.c. A household purchase of a durable item is included in GDP and appears as part of the expenditure component consumption.d. Interest on a private corporation's debt is included in GDP and appears as part of the income component corporate income, which incorporates all corporations' payments of interest.

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e. Spending on goods and services by a provincial government is included in GDP and appears as part of the expenditure component government purchases.f. A financial transaction is excluded from GDP because it merely shifts purchasing power from one economic participant to another and so is part of none of the components of GDP.g. A government transfer payment is excluded from GDP because it represents merely a shift of purchasing power from taxpayers to the transfer payment recipient, and so is part of none of the components of GDP.h. A foreigner's purchase of a Canadian-made good is included in GDP and appears as part of the expenditure component net exports.

2. a. Use the expenditure equation: GDP = C + I + G + (X - M). The expenditure-based estimate of GDP is $162 billion [= $85 billion + $35 billion + 43 billion + ($14 billion - 15 billion)]. b. Using the income approach GDP is calculated as the sum of: GDP = Wages and salaries + Corporate income + Proprietors' incomes and rents + Indirect taxes + Depreciation. Note that depreciation can be calculated as the difference between gross and net investment: Depreciation = Gross investment - Net investment. The income-based estimate of GDP is $194 billion [= $76 billion + $55 billion + $29 billion + $25 billion + ($35 billion - $26 billion)].c. The statistical discrepancy is $16 billion, found by taking the difference between the two GDP estimates ($32 billion = $194 billion - $162 billion) and then dividing by two (= $32 billion / 2). d. Macronia's GDP is halfway between the two estimates, or $178 billion (= $162 billion + $16 billion = $194 billion - $16 billion).e. Macronia's depreciation is $9 billion, found by deducting net investment ($26 billion) from gross investment ($35 billion).

8.2 Practice Problems

1. a. Recall that GDP per capita equals GDP divided by the population. Per capita GDP in terms of the country's own dollars is $39,167 (= $235 billion / 6 million).b. Per capita GDP in terms of US dollars is $21,933 [= ($235 billion / 6 million) x 0.56].c. Per capita GDP in terms of PPP-adjusted US dollars is $23,500 [= ($235 billion / 6 million) x 0.60].d. Because the PPP-adjusted US-dollar value of the country's currency is higher than the unadjusted US dollar value, prices in this country are lower than in the United States. Once this difference in the price levels in the two countries is taken into account, the purchasing power of this country's income, as shown by per capita GDP in PPP-adjusted US dollars, is higher than is shown by the unadjusted per capita GDP in US dollars.

2. a. In this case because incomes received by residents for their contributions to production elsewhere, which are added to GDP to derive GNI, are greater than the incomes of non-residents for their contributions to production in the country, which are subtracted from GDP to derive GNI, the country's GNI is higher than GDP and there is a net inflow of income into the country.b. The country's residents benefit because their incomes exceed the production that takes place in the country.

End of Chapter Problems

1. a. The income-based estimate of GDP = wages and salaries (546) + corporate income (98) + proprietors' incomes and rents (56) + indirect taxes (75) + depreciation (79) = $854 billion.b. The expenditure-based estimate of GDP = personal consumption (490) + gross investment (157) + government purchases (184) + net exports [exports (68) - imports (27)] = $872 billion.

c. Given the $18 (= $872 - $854) billion difference between the income-based and expenditure-based GDP estimates in part a, half this amount ($9 billion) is added to the lower income-based estimate ($854 billion) and half this amount is subtracted from the higher expenditure-based estimate ($872 billion).

d. The GDP value of $863 billion is found either be deducting the $9 billion statistical discrepancy from the income-based estimate of $872 billion or adding $9 billion to the expenditure-based estimate of $854 billion.e. Because net investment is $78 (= $157 - $79) billion, Metrica's capital stock is expanding by this amount in 2015.f. Metrica's GNI is found by deducting its net international income to the rest of the world ($8 billion) from GDP ($863 billion), giving a GNI of $855 (= $863 - $8) billion. Because GNI is less than GDP there is a net outflow of investment income from the country, so that income earned by residents of other countries for their involvement in production in Metrica is greater than income earned by residents of Metrica for their involvement in production in the rest of the world.

2. a. So that final and intermediate products are not double counted (which would lead to a total value of $6.35), only the extra worth of the salmon at each stage of production is included in GDP. This extra worth is calculated by subtracting the cost of

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materials from the value of the business's output. In the first stage of production, the value added by the fisherman is the value of the salmon sold to the food processor ($1.40). In the second stage, the value added by the food processor is $0.80, and in the third stage, the value added by the retailer is $0.55.b. The total value added in all three production stages ($2.75) therefore equals the value of the final product.c. If final and intermediate products were double counted, the salmon's total value incorporated in GDP would be the sum of the value of the fish when sold to the food processor by the fisher, its value when sold to the retailer by the food processor to the retailer, and then its value when sold by the retailer to the consumer, or $6.35 (= $1.40 + $2.20 + $2.75).

3. a. A movie-theatre ticket is always a final product and never an intermediate product because it cannot be resold or processed further.b. A roll of newsprint is never a final product and always an intermediate product because it must be processed further.c. Electrical power is sometimes a final product and sometimes an intermediate product. It is a final product if used by a household and an intermediate product if used by a business.

4. a. A household purchase of a service is included in GDP and appears as part of the expenditure component consumption.b. Interest on government debt is excluded from GDP because it represents merely a shift of purchasing power from taxpayers to the bondholder and so is part of none of the components of GDP.c. A business's purchase of capital equipment is included in GDP and appears as part of the expenditure component investment.d. A nonmarket activity is excluded from GDP because its value is not captured by official statistics and so is part of none of the components of GDP.e. A government transfer payment is excluded from GDP because it represents merely a shift of purchasing power from taxpayers to the transfer payment recipient and so is part of none of the components of GDP.f. A government's expenditure on goods and services is included in GDP and appears as part of the expenditure component government purchases.g. An increase in business inventories is included in GDP and appears as part of the expenditure component investment.h. A purchase of used goods is excluded from GDP since it has already been counted when it was first sold, and so is part of none of the components of GDP.i. A government subsidy is excluded from GDP because it represents merely a shift of purchasing power from taxpayers to the subsidy recipient and so is part of none of the components of GDP.j. A foreigner's purchase of a Canadian-made good is included in GDP and appears as part of the expenditure component net exports.k. A financial transaction is excluded from GDP because it represents merely a shift of purchasing power and so is part of none of the components of GDP.l. A nonmarket activity is excluded from GDP because its value is not captured by official statistics and so is part of none of the components of GDP.

5. a. Since the decline in living standards caused by less leisure does not appear in GDP, the change in living standards is overstated.b. Because the rise in living standards associated with the growth of this sector is left out of GDP, the change in living standards is understated.c. The growth in living standards associated with increasing environmental sustainability is missing from GDP, which means that the change in living standards is understatedd. The drop in living standards that occurs because of the less equitable distribution of income is not captured in GDP, so the change in living standards is overstated.

6. A is Resource Markets; B is Government; C is Businesses; D is Financial Markets; E is Households; F is Rest of the World; G is Product Markets.

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7. (Essay) Because the cleanup of the spill used scarce economic resources (which could have been utilized for a variety of other purposes) and increased welfare (given that the spill happened and had to be dealt with), most economists would argue that the clean-up of the spill should be included in GDP calculations. Critics would argue that, because the clean-up expenditures were simply reversing the decline in welfare that occurred due to the spill, they should not be included in GDP.

Internet Application Problems

1. Access Statistics Canada's web site (at http://www.statcan.gc.ca/). Browse by subject to "Economic accounts", then select "Income and expenditure accounts". Find the summary table "Gross domestic product, expenditure-based" and use it to answer the questions below. Fill in the table below to find the values, for 2010, of the components of expenditure-based GDP at market prices: (i) personal consumption, (ii) gross investment, (iii) government purchases, (iv) net exports, and (v) the statistical discrepancy. Then find total expenditure-based GDP at market prices, and the relative percentage contribution of each component of GDP to the total. Enter all your responses below rounded to a whole number.

 

Expenditure ComponentValue in

$millions for 2010

Percentage Contribution to

Total GDPHousehold final consumption expenditure [915,271]

Non-profit institutions serving households' final consumption expenditure [23,502]

Total Personal Consumption (C) [983,773] [56]%

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General governments final consumption expenditure [366,346]

Total Government Purchases (G) [366,346] [22]%Business gross fixed capital formation [307,240]

Non-profit institutions serving households' gross fixed capital formation [2,235]

General governments gross fixed capital formation [78,501]

Investment in inventories [125]Total Gross Investment (I) [388,101] [23]%

Exports of goods and services [483,212]Less: imports of goods and services [514,821]

Total Net Exports (NX) [-31,609] [-2]% Statistical Discrepancy [1,146] GDP at market prices [1,662,757] Explanation:

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2. Access Statistics Canada's web site (at http://www.statcan.gc.ca/). Browse by subject to "Economic accounts", then select "Income and expenditure accounts". Find the summary table "Gross domestic product, income-based" and use it to answer the questions below. Fill in the table below to find the values, for 2010, of the components of income-based GDP at market prices. Then find total income-based GDP at market prices, and the relative percentage contribution of each component of GDP to the total. Enter all your responses below rounded to a whole number.

 

Income Component Value in Percentage

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$millions for 2010

Contribution to Total GDP

Wages and salaries [727,617]Employers' social contributions [111,759]

Total Wages and Salaries (or Compensation of Employees) [839,376] [50]%

Net operating surplus: corporations* [232,293]Total Corporate Income [232,293] [14]%

Net mixed income [145,645]Total Proprietors Incomes and Rents [145,645] [9]%

Taxes less subsidies on production [71,775]Taxes less subsidies on products and imports [98,635]

Total Indirect Taxes [170,428] [10]%Consumption of fixed capital: corporations [173,719]

Consumption of fixed capital: general governments and non-profit institutions serving households [54,719]

Consumption of fixed capital: unincorporated businesses [47,723]

 Total Depreciation [276,161] [17]% Statistical Discrepancy [-1,146] GDP at market prices [1,662,757]*Note that interest income is included as part of operating surplus (see: http://www.statcan.gc.ca/nea-cen/hr2012-rh2012/papers-articles/qna-cnt/qna-cnt-eng.htm). Explanation:

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3. Access Statistics Canada's CANSIM site (at http://www5.statcan.gc.ca/cansim/). Browse by key resource to "System of national economic accounts" and then to "Data tables". Expand the "Special Studies" folder, then expand the "Purchasing power parities" folder, and select the "Purchasing power parities, consumption-based" table. Click on the tab to "Add/Remove data", then scroll down to make selections under "Option 2: Customize a table view." Under "Step 2 - Select: Comparisons" select only "Purchasing power parities (United States dollars per Canadian dollar)", then under step 3 select only "Gross domestic income (GDI)". Next select the time frame as from 1992 to 2011 and finally under step 6 press the "Apply" button.

a. Using the information generated above, create a graph showing the purchasing power parity for the Canadian dollar in terms of the American dollar for Gross Domestic Product from 1992 to 2011.

b. Access http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/econ07-eng.htm. If the Canadian dollar were trading at its purchasing power parity in 2011, would it have been lower or higher than it was? 

If the Canadian dollar were trading at its purchasing power parity in 2011 then the $CDN / $US exchange rate would have been [higher; lower*; the same] than was actually observed in 2011. Explanation:

a.

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Note that "Comparative price levels" is calculated by dividing the purchasing power parities (PPP) by the annual exchange rate (United States cents per Canadian dollar). A value greater than 100 indicates that the annual $CDN / $US exchange rate was lower than the PPP rate, a value of 100 indicates the exchange and PPP rates coincide, and a value below 100 indicates that the exchange rate was higher than the PPP rate.

b. As shown in the table, the annual $CDN / $US exchange rate in 2011 was very near $1, or parity, which is higher than the PPP rate of 0.91 shown in the CANSIM data from Statistics Canada. 

4. Access the World Bank's website (at http://www.worldbank.org/). Browse to "Data", then under "Find an indicator" type in "GDP per capita" and choose "GDP per capita, PPP (current international $)" and press the go button. Enter all your responses below as a whole number. 

a. Find the countries with the 10 highest PPP-adjusted per capita GDP levels in 2011. (Hint: sort the data by 2011 in descending values, by clicking on 2011 in the header row.)

Rank Country1   Luxembourg2   Qatar3   Macao SAR, China4   Norway5   Singapore6   Brunei Darussalam7   Switzerland8   Hong Kong SAR, China9   United States10   Kuwait

b. What ranking does Canada have in this same year's list based on this PPP-adjusted per capita GDP? Canada is ranked number [15].

c. Using the same website for 2011 navigate to the dataset "GDP per capita (current US$)", then find the countries with the 10 highest GDP levels in terms of US dollars (not adjusted for PPP). 

Rank Country1   Monaco2   Luxembourg

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3   Norway 4   Qatar5   Bermuda6   Switzerland7   Macao SAR, China 8   Australia9   Denmark10   Sweden

 d. What ranking does Canada have in this same year's list based on US$ GDP not adjusted for PPP? Canada is ranked number [11].

Explanation:a.

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b. Canada is ranked at number 15.

c. 

d. Canada is ranked as number 11, which is higher than when GDP is adjusted for PPP.

Advancing Economic Thought Problems

1. (Essay) Not all commentators agree with the Human Development Index's discounting of extra per capita income for relatively rich countries at higher and higher rates as they grow richer. Many of these commentators believe that an undiscounted version of GNI should be the one used. The life expectancy statistic, meanwhile, is one that changes very gradually and is hard to estimate, especially when the Human Development Index is affected by annual changes in this number.

2. a. Rank Country

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1   Qatar2   Liechtenstein3   Kuwait4   Singapore5   Norway6   Luxembourg7   Brunei Darussalam8   Hong Kong, China (SAR)9   United States10   United Arab Emirates

Answers are found in the column under the heading "2012 Gross National Income (GNI) per capita", by pressing on "menu" next to the column heading and choosing "descending" for a list of countries in descending order, ranked from first to last.b.

Rank Country1   Japan2   Hong Kong, China (SAR)3   Switzerland4   Monaco5   Italy6   Australia7   Iceland8   San Marino9   Israel10   France

Similarly answers are found in the column under the heading "2012 Life Expectancy at Birth", by pressing on "menu" next to the column heading and choosing "descending" for a list of countries in descending order, ranked from first to last.c. Given the marked difference in the list of countries included in the two top-ten lists in parts a and b, there is no close alignment between per capita GNI levels and life expectancy.

3. (Essay) The United Nations Development Programme sets a minimum and a maximum for each variable and then shows where each country stands in relation to these scales, expressed as a value between 0 and 1. For example, in 2013 the mean years of schooling is various countries varied between 0 and 13.3 years, while expected years of schooling varied between 0 and 18 years. Life expectancy varied between 20 and 83.6 years and the income measure varied between US$200 (PPP) and $87,487 (PPP). Income above the average world income is adjusted using a progressively higher discount rate. The scores for the three dimensions (the two schooling indices are combined in a single knowledge component) are then averaged in an overall index.

Simulation

1. Introductory Information

Time:Approximately 30 minutes.

Materials:Four packages of popsicle sticksGlueColoured markersPaper and scissorsAbout $10,000 in Monopoly or play money

Set-up:Divide the class into seven groups

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Seat each group at a separate tableEach group (except Group 1) should be given $1,000 of Monopoly or play money

Key Concepts Covered:double-countingexpenditure approachfinal productsGDPintermediate productsvalue added

Learning Objectives:- Illustrate and discuss the reasons and the process for calculating GDP using the expenditure approach.- Demonstrate an understanding of final products and intermediate products and how they are dealt with in the calculation of GDP.- Show an appreciation of why double-counting occurs in the calculation of GDP, and how the concept value added deals with the issue.

2. Exercise

Recall that students have been split into 7 groups, each seated at separate tables.  Timekeeper: Allow ten minutes for everyone to complete the market cycle. 

Stage 1: Become familiar with your group's place in the market cycle using the information below. Group 1 is a lumber company that cuts down trees and processes and paints the wood. This group sells blue lumber to Group 2 and yellow lumber to Group 3 at $5 for each piece. Group 1 members are responsible for colouring the popsicle sticks blue and yellow to match the needs of their two sets of buyers.

Group 2 are the core boat manufacturers. They create the main body of the sailboat with blue popsicle sticks as shown in the image below and with glue that they already own. They buy the sticks from Group 1 and sell the cores to Group 5. They charge $50 to make each core, plus the cost of the sticks they buy from Group 1. 

Group 3 is the boat framing company that creates sail frames with yellow popsicle sticks and with glue they already own as shown in the image below. They buy the sticks from Group 1 and sell the frames to Group 5. They charge $40 to make the sail frames, plus the cost of the sticks they buy from Group 1. 

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Group 4 is the sail manufacturer and installer. To make the sails, Group 4 cuts and colours the red paper then installs the paper onto the sail supports, as shown in the image below. The paper they use is purchased for $3 a piece from an outside company (money that goes to the instructor as payment), while they sell their services to Group 5. They charge $20 to put in the sails, plus the cost of the paper they purchase.

Group 5 is the sailboat retail company which pays Groups 2, 3, and 4 for their products and services. The group then sells each final sailboat to Group 6 for $250.

Group 6 are the buyers of sailboats. They purchase the boats from Group 5 then sell their used sailboats to Group 7 for $150.

Group 7 are buyers of used sailboats. They make their purchases from Group 6.

Stage 2: Give the students the necessary materials and ten minutes to complete the full market cycle. 

Which portion of the process should be included in the expenditure calculation of GDP?

Purchases of every good used in the production of new sail boats, as well as the sail boats themselves, would be included in the GDP calculation.Purchases of every good used in the production of new sail boats, new sail boats, and used sail boats would be included in the GDP calculation.

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Only the purchases of new sail boats would be included in the GDP calculation.*Purchases of new and used sail boats would be included in the GDP calculation.  Explanation:

Only the $250 purchases of new sail boats would be included in the GDP calculation.

Follow-up areas of learning:- Discussion of value added activities- Additional discussions could include the secondary market in which Group 6 sells used sailboats to Group 7.

3. Discussion Questions (essay)

1. Fill in the table below, of value added in making one sailboat based on the monetary amounts at which exchanges were made at each stage of production starting with Group 1 and ending with Group 5. Note: the table below must be manually graded. Answers will depend on the exact way Groups 2, 3 and 4 chose to use popsicle sticks and paper to construct their various sailboat components. The answers provided below are for illustrative purposes. 

Production Stage Total Value Paid/Received Value Added Business That Adds

ValueBlue and yellow lumber is made [30] [30] [Group 1]

Main body of the boat is built [80] [50] [Group 2]Sail frames are built [120] [40] [Group 3]

Sails are manufactured and installed [143] [23] [Group 4]Sail boat is sold [250] [107] [Group 5]

2. Select a product or service in your city or town. Describe the value added activities that went into creating that product . Describe what parts of the process would be included in the calculation of GDP.

Explanation:

1. Numerical results will differ depending on the exact way Groups 2, 3 and 4 chose to use popsicle sticks and paper to construct their various sail boat components.

For example, if one sailboat uses 6 popsicle sticks, then at the first stage (Group 1), the total value paid/received is $30 (= $5 x 6) and the value added is also $30 (= $30 - $0).   At the second stage (Group 2), the total value paid/received is $80 (= $30 + $50) and the value added is $50 (= $80 - $30).   At the third stage (Group 3), the total value paid/received is $120 (= $30 + $50 + $40) and the value added is $40 (= $120 - $80).   At the fourth stage (Group 4), if one sailboat uses one sheet of paper, then the total value paid/received is $143 (= $120 + $20 + $3) and the value added is $23 (= $143 - $120).   At the fifth stage (Group 5), the total value paid/received is $250 (ie. the retail price of a sailboat), while the value added is $107 (= $250 - $143).

2. Answers will vary depending on the illustration chosen by the student.

4 Multiple Choice Questions

1. If Group 2 uses 10 blue popsicle sticks bought from Group 1 to make 2 boat cores, then the total amount they charge to Group 5 for each of these cores will be:

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$50.$60.$70.$75.*$80.

2. If Group 3 uses 4 yellow popsicle sticks bought from Group 1 to make 2 sail frames, then the total amount they charge to Group 5 for each of these frames will be

$40.$50.*$60.$70.$80.

3. If Group 5 pays Groups 2, 3 and 4 a total of $150 per sailboat for the materials they buy from these groups, then the value added by Group 5 after they sell each boat is:

$100.*$150.$250.$400.none of the above

4. Which of the following would be considered value added activity in the sailboat market?

the installation of sails*the selling of a used boatthe repainting of a boat by a buyer after the boat's purchaseall of the abovenone of the above

5. In this exercise, which part of the market process was not present?

value added activitiesthe sale of used products in a secondary marketfinal disposal of used products*all of the abovenone of the above

6. Which of the following is not a value added activity in the production of sailboats?

paintingconstructionsailing*lumber cutting Explanation:

1. If Group 2 uses 10 blue popsicle sticks bought from Group 1 to make 2 boat cores, then the total amount they charge to Group 5 for each of these cores will be $75. Each popsicle stick costs $5, 5 popsicle sticks are used to made 1 boat core, and the process of making each core costs $50. Therefore the total amount charged for each core is $75 [= (5 x $5) + $50].

2. If Group 3 uses 4 yellow popsicle sticks bought from Group 1 to make 2 sail frames, then the total amount they charge to Group 5 for each of these frames will be $50. Each popsicle stick costs $5, 2 popsicle sticks are used to make 1 sail frame, and the process of making each frame costs $40. Therefore the total amount charged for each sail frame is $50[= (2 x $5) + $40].

3. If Group 5 pays Groups 2, 3 and 4 a total of $150 per sailboat for the materials they buy from these groups, then the value added by Group 5 after they sell each boat is $100. The value added after selling each boat is found by subtracting Group 5's total outlay per boat of $150 from the $250 retail price.

4. The installation of sails would be considered value added activity in the sailboat market. Selling a used boat or repainting a

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boat after purchase are not included in the GDP calculation.

5. In this exercise, the final disposal of used products part of the market process was not present.

6. Sailing is not a value added activity in the production of sailboats. Instead it is the activity associated with consumption of the boat.

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