GDP worksheet
The answer key prints on its own page, so hand out everything before it.
GDP: practice worksheet
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
2. Which of the following would be counted in U.S. GDP for this year?
- (A) A family selling their used car to a neighbor
- (B) The federal government paying Social Security benefits
- (C) A restaurant purchasing flour from a wholesale supplier
- (D) A homebuilder constructing and selling a new house
3. If nominal GDP increased by 8% and the GDP deflator increased by 5%, real GDP growth was approximately:
- (A) 13%
- (B) 8%
- (C) 5%
- (D) 3%
4. Which component of GDP (expenditure approach) is typically the largest in the United States?
- (A) Investment (I)
- (B) Government purchases (G)
- (C) Net exports (NX)
- (D) Consumption (C)
5. A parent quits a $60,000 job to stay home and care for their children full-time. What happens to GDP?
- (A) GDP is unaffected because childcare is always excluded
- (B) GDP decreases because the parent's paid output is lost, while unpaid caregiving is not counted
- (C) GDP increases because the family saves on daycare costs
- (D) GDP increases because the parent is now more productive
6. 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
7. In a year when the GDP deflator equals 100, which of the following must be true?
- (A) The economy is experiencing no inflation
- (B) Nominal GDP and real GDP are equal because this is the base year
- (C) The economy is in a recession
- (D) Consumer prices have not changed since last year
8. An economy produces only shoes and shirts. In the base year, 100 shoes sell at $50 and 200 shirts sell at $20. In the current year, 120 shoes sell at $60 and 220 shirts sell at $25. What is the current-year real GDP?
- (A) $12,700
- (B) $10,400
- (C) $12,200
- (D) $9,000
9. Nominal GDP is $800 billion and real GDP is $640 billion. What is the GDP deflator, and what does it indicate?
- (A) 80; the price level has fallen 20% since the base year
- (B) 125; the price level has risen 25% since the base year
- (C) 160; the economy is in a recession
- (D) 1.25; nominal GDP exceeds real GDP by 25 percentage points
10. Which of the following transactions would NOT be included in the calculation of GDP?
- (A) A law firm billing a client $5,000 for legal services
- (B) The federal government purchasing $2 million in new military equipment
- (C) A homeowner selling her house, built in 2005, for $350,000 in the current year
- (D) A car manufacturer producing 1,000 vehicles that remain unsold in inventory at year-end
GDP: answer key
1. (B) 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. (D) A new house is a final good produced in the current period. Option A fails because used goods were already counted when first produced. Option B is a transfer payment, so no new production occurs in exchange. Option C is an intermediate good whose value will be captured in the final product sold to consumers.
3. (D) Real GDP growth approximately equals nominal growth minus inflation: 8% − 5% = 3%. The precise formula ((1.08 / 1.05) − 1) yields about 2.86%, which rounds to 3%. Option A incorrectly adds the two figures. Option B ignores inflation entirely. Option C mistakes the inflation rate for the growth rate.
4. (D) Consumer spending has dominated U.S. GDP since national income accounting began, making up roughly 68-70% of the total in recent decades. Investment runs around 17-18%, government purchases around 17%, and net exports are typically negative because the U.S. has run a trade deficit almost continuously since 1976.
5. (B) GDP only captures market transactions. The $60,000 salary was counted; unpaid caregiving at home is not, even though it has real economic value. This is one of the limitations Kuznets identified in the 1930s. Option A is wrong because paid childcare (daycare services) IS counted in GDP. Option C confuses saving money with producing output.
6. (B) 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.
7. (B) A GDP deflator of 100 means nominal GDP equals real GDP, which is the definition of the base year, since current prices match base-year prices. Option A is misleading; the deflator being 100 just means the price level matches the base year, not that there is zero year-over-year inflation. Option D confuses the GDP deflator with the CPI; they measure different baskets of goods.
8. (B) Real GDP applies base-year prices to current-year quantities: shoes at 120 × $50 = $6,000; shirts at 220 × $20 = $4,400. Total: $10,400. Option A ($12,700) is nominal GDP for the current year (120 × $60 + 220 × $25), which fails to strip out price increases. Option D ($9,000) is base-year nominal GDP (100 × $50 + 200 × $20). Option C does not correspond to any correct calculation with the given data.
9. (B) GDP deflator = (Nominal / Real) × 100 = ($800B / $640B) × 100 = 125. A deflator of 125 means the overall price level is 25% higher than in the base year. Option A reverses the formula (divides real by nominal). Option C produces an arithmetic error and incorrectly connects a price index to a recession call. Option D omits the multiplication by 100, which is not the standard format.
10. (C) Reselling an existing home does not represent new production, because that house was already counted when it was built in 2005. The real estate agent's commission would count as a current service, but the home itself does not re-enter GDP. Option A is a current final service. Option B is government purchases (G). Option D counts because unsold inventory is classified as investment (I) in GDP accounting, and the vehicles were produced in the current period.