GDP Practice Questions

8 representative multiple-choice questions on gdp for AP Macroeconomics, drawn from our 46-question bank for this module. Work through each one, then open “Show answer” for the correct choice and an explanation. For scored, timed practice across the full bank, take a full practice test.

Prefer to read? The same questions, with answers

1. 1. A U.S. citizen owns a factory in Mexico. The output of that factory is included in:

   • A. U.S. GDP only
   • B. Mexico's GDP only
   • C. Both U.S. GDP and Mexico's GDP
   • D. Neither country's GDP
   Show answer

   Correct answer: B. Mexico's GDP only

   GDP measures production within a country's borders, regardless of ownership. The factory is in Mexico, so its output counts toward Mexico's GDP. Ownership would matter for GNP (Gross National Product), which tracks output by a country's citizens. Option A confuses GDP with GNP, a distinction formalized in national accounting standards after World War II.

2. 2. Why does GDP exclude intermediate goods from its calculation?

   • A. Intermediate goods have no economic value
   • B. Including them would result in double counting
   • C. Only services are counted in GDP, not goods
   • D. Intermediate goods are only counted in GNP
   Show answer

   Correct answer: B. Including them would result in double counting

   The value of intermediate goods is already embedded in the final good's price. Counting the steel sold to General Motors AND the finished Chevrolet would count the steel twice, inflating GDP beyond the true value of final production. Option A is wrong because intermediate goods absolutely have value; their value is simply captured downstream in the final product.

3. 3. A steel company sells $10 million worth of steel to an automobile manufacturer, which then produces cars sold to consumers for $25 million. What is the contribution to GDP from these transactions?

   • A. $35 million, because both the steel and cars are productive output
   • B. $25 million, because only the final goods sold to consumers are counted
   • C. $15 million, because GDP only counts the value added at each stage
   • D. $10 million, because only the intermediate good represents real production
   Show answer

   Correct answer: B. $25 million, because only the final goods sold to consumers are counted

   GDP counts only final goods to avoid double counting. The $10 million in steel is embedded in the $25 million car price. Option A commits that double-counting error. Option C ($15 million) represents only the auto manufacturer's value added, but the value-added approach sums all stages ($10M + $15M = $25M), reaching the same answer. Option D incorrectly excludes the final product.

4. 4. Which of the following best illustrates the difference between GDP and GNP for the United States?

   • A. Wages earned by a Japanese autoworker at a Toyota plant in Texas are in U.S. GDP but not U.S. GNP
   • B. Profits earned by a U.S. software company's subsidiary in Ireland are in U.S. GDP but not U.S. GNP
   • C. Transfer payments from the U.S. government to retirees are in GNP but not GDP
   • D. Used-car sales are in GNP but not GDP
   Show answer

   Correct answer: A. Wages earned by a Japanese autoworker at a Toyota plant in Texas are in U.S. GDP but not U.S. GNP

   GDP is about production location (Texas = U.S. GDP). GNP is about national ownership — that autoworker's income flows to a Japanese resident, so it's in Japan's GNP, not the U.S. GNP. Option B reverses the logic: the Irish subsidiary's profits are in Ireland's GDP and (for the U.S.-owned portion) the U.S. GNP. Options C and D describe things excluded from both measures.

5. 5. Why are imports subtracted in the expenditure approach to GDP?

   • A. Because imports reduce national wealth
   • B. Because they were produced abroad but are already counted inside C, I or G
   • C. Because they are taxed differently
   • D. Because they are measured in foreign currency
   Show answer

   Correct answer: B. Because they were produced abroad but are already counted inside C, I or G

   When a household buys an imported car, that spending is already sitting in consumption. GDP measures domestic PRODUCTION, so the import has to be taken back out. The subtraction is a correction for double counting, not a judgement that imports are bad for the economy.

6. 6. CPI rises from 120 to 126 over one year. What is the inflation rate?

   • A. 4.8%
   • B. 6%
   • C. 5%
   • D. 126%
   Show answer

   Correct answer: C. 5%

   Inflation = (new CPI - old CPI) / old CPI x 100 = (126 - 120) / 120 x 100 = 5%. Answering 6% reports the change in index POINTS rather than the percentage change, which is the error the question is built to catch: index points and percent are not the same unit.

7. 7. In the circular flow model, which flow moves from households to firms?

   • A. Factors of production and spending on goods
   • B. Goods and services only
   • C. Transfer payments
   • D. Wages, rent, interest and profit
   Show answer

   Correct answer: A. Factors of production and spending on goods

   Households supply factors of production in the resource market and spend income on goods in the product market, so both flow toward firms. Firms send goods and services back, and pay wages, rent, interest and profit as income. Every dollar of spending is someone's income, which is why the expenditure and income approaches to GDP agree.

8. 8. Nominal GDP is $15,000 billion with a deflator of 125. What is real GDP?

   • A. $13,500 billion
   • B. $18,750 billion
   • C. $12,000 billion
   • D. $120 billion
   Show answer

   Correct answer: C. $12,000 billion

   15,000 / 1.25 = $12,000 billion. Because the deflator is above 100, real GDP must be SMALLER than nominal, which rules out $18,750 billion without doing any arithmetic. That sanity check catches most errors in this calculation before they cost a mark.