Name _____________________________

Problem Set 1 – Gross Domestic Product

1. Sketch the 5-sector circular flow of money. Be sure to label the injections and leakages.

2. Write the formula to calculate GDP. Indicate what each variable represents.

3. Calculate the nominal GDP of the United States given the expenditures in the table
below.

Product/Service Quantity Price

Food 10 1
New Cars 2 100
Old Inventory 5 4
Traffic Lights 3 5
Stocks 20 2
Unemployment Benefits 10 2
New Computers 4 10
Exports 5 2
Imports 15 4
4. Which of the following products do NOT count toward McLandia’s GDP? Check all that
apply.

c Payment to a neighbor for baby-sitting services

c Purchase of a new tire to replace a flat tire

c McRomeo’s purchases bread to use in the sandwiches they sell

c Marijuana purchased from a dispensary

c Marijuana purchased from a dealer

c Clothing made in America, but sold in McLandia

c Clothing made in McLandia, but sold in America

5. Explain why imports must be subtracted out of GDP.

Use the table below to answer questions 6-7.

Component
Product/Service Quantity Price
of GDP
Clothing 10 2
Infrastructure 2 50
Transfer Payments 5 10
Capital 1 20
Imports 6 5
Exports 3 5
Stocks 4 10

6. In the second column, indicate what component of GDP the product makes up. If the
product is not included in GDP, write “N/A.”

7. Calculate the nominal GDP of the United States. Show your work.
The table below shows all the products produced and sold in Macrostan in 2004 and 2018. Use
the table below to answer questions 3-6.

2004 2018
Product/Service
Quantity Price ($) Quantity Price ($)
Rice 15 4 10 5
Avocados 10 4 5 8
Chickens 5 10 6 15
Coffee 20 5 25 4

8. Calculate Macrostan’s nominal GDP in 2004. Show your work.

9. Calculate Macrostan’s nominal GDP in 2018. Show your work.

10. Calculate Macrostan’s real GDP in 2018 using 2004 as a base year. Show your work.

11. Calculate the inflation rate in Macrostan in 2018. Show your work.
The table below shows all the products produced and sold in Microlandia in 1995 and 2005. Use
the table below to answer questions 7-10.

1995 2005
Product/Service
Quantity Price Quantity Price
Cards 15 2 10 4
Root Beer 10 3 12 5
Chips 20 2 20 3
Salsa 25 1 15 2

12. Calculate Microlandia’s nominal GDP in 1995. Show your work.

13. Calculate Microlandia’s nominal GDP in 2005. Show your work.

14. Was Microlandia’s economy stronger in 1995 or 2005? Justify your reasoning.

15. Calculate the inflation rate in Microlandia in 2005. Show your work.
16. Macrostan’s nominal GDP in 2018 was $200 while its real GDP in 2018 was $150.
Macrostan’s nominal GDP in 2015 was $100 while its real GDP in 2015 was $150.

a. Calculate the inflation rate in 2018. Show your work.

b. Calculate the GDP growth rate from 2015 to 2018. Show your work.

17. Microlandia experienced 10% inflation in 2007. If its nominal GDP in 2007 was $500,
what was its real GDP? Show your work.

18. Macrostan experienced 25% inflation in 2000. If its real GDP in 2000 was $200, what
was its nominal GDP? Show your work.

19. McKinney Island experienced 50% deflation in 2010. If its nominal GDP in 2010 was
$2,000, what was its real GDP? Show your work.