Name: ________________________

WHAT’S IN GDP?

A. Components of GDP: Fill in the blank with the component of GDP each of these items would fit into.

1. ________________ A mechanic fixes a transmission.

2. ________________ A business purchases computer software and a PC.
3. ________________ A local library purchases new audio books.
4. ________________ A retailer purchases tennis shoes from a Chinese manufacturer, then sells them.
5. ________________ A mother purchases the same shoes from the retailer.
Write one more example for each of the four components.

6. Consumption ________________________________________________________________________
7. Investment________________________________________________________________________
8. Government spending __________________________________________________________________
9. Net exports ________________________________________________________________________
10. Explain why the sale of used goods is not included in GDP:

B. You are an economist who has been asked to calculate your nation’s GDP, which produces only three
goods/services. Calculate nominal GDP for Year 1 and Year 2. GDP = Price x Quantity.

Year 1 Nominal GDP Year 2 Nominal GDP

Good Price Quantity GDP Good Price Quantity GDP
Oil changes $ 15 5 _______ Oil Changes $ 18 6 ______
Hamburgers $ 2 20 _______ Hamburgers $ 3 25 ______
MP3 players $ 150 3 _______ MP3 players $ 175 5 ______
TOTAL: _______ TOTAL: ______
11.How much did nominal GDP increase from Year 1 to Year 2? ____________

Now calculate Year 2 real GDP using Year 1 as the base year (that means you use Year 1 prices to calculate
Year 2’s GDP)
Year 1 Real GDP Year 2 Real GDP (Year 1 base year)
Good Price Quantity GDP Good Price Quantity GDP
Oil changes $ 15 5 _______ Oil Changes $ 15 6 ______
Hamburgers $ 2 20 _______ Hamburgers $ 2 25 ______
MP3 players $ 150 3 _______ MP3 players $ 150 5 ______
TOTAL: _______ TOTAL: ______
12. How much did Year 2’s nominal GDP overstate GDP in Year 2 when compared to real GDP? ______

13. How much did real GDP increase from Year 1 to Year 2? _______

14. Why is it important to adjust nominal GDP to real GDP to account for inflation?

C. Assume that a country has a closed economy with only three goods/services (no net exports). In a given
year, the economy produces: a) three haircuts at $10 each; b) two factory machines at $100 each; and c)
one highway repair that costs $500.

15. What is total GDP for this economy? ________

16. What percent of GDP is consumption? ________

17. What percent of GDP is investment? ________

18. What percent of GDP is government spending? ________
19. Suppose an economy’s nominal GDP increased 3 percent in 2008. Why is this information alone not
enough to determine whether the economy experienced economic growth? What other information would
you need to determine that?

20. Why is GDP not a true measure of the standard of living? What other factors should be considered
when determining a country’s standard of living?

D. In this exercise, you calculate nominal and real GDP for a simple economy. You then calculate real GDP
growth using two base years and discuss the differences.

Suppose than an economy consists of only two types of products: computers and automobiles. Sales and price
data for these two products for two different years are as shown below:

Year No. of Computers Price Per Computer No. of Automobiles Price Per
Sold Sold Automobile
1990 500,000 $6000 1,000,000 $12,000
2000 5,000,000 $2000 1,500,000 $20,000

21. Nominal GDP in any year is calculated by multiplying the quantity of each final product sold by its price
and summing over all final goods and services. Assuming that all computers and automobiles are final
goods, calculate nominal GDP in 1990 and in 2000.

22. Real GDP in any year is calculated by multiplying that year’s quantities of goods and services by their
prices in some base year. Calculate real GDP in 1990 and 2000, using 1990 as the base year.

23. Calculate the percentage change in real GDP between 1990 and 2000 using 1990 as the base year.

24. Calculate real GDP in 1990 and 2000, using 2000 as the base year.

25. Calculate the percentage change in real GDP between 1990 and 2000 using 2000 as the base year.

26. Explain why your answers to parts c and e are different. Do you feel there is one that more accurately
measures the true growth in GDP? Which one, and why?