4 Gross Domestic Product
4.1 Measuring the size of an economy: Gross domestic product
Review Activities
Directions: Determine if each of the following transactions would be in the current year GDP for the United States. Unless otherwise stated, assume the good was produced this year and was manufactured in the United States.
Directions: The following transactions are all part of GDP. Which component of GDP does each belong to?
Practice Problems
No practice problems for this section.
External Resources
Khan Academy: Circular flow model and expenditures
Khan Academy: Parsing GDP
Khan Academy: Investment and Consumption
Khan Academy: Components of GDP
4.2 What is not in gross domestic product?
Review Activities
Directions: Fill-in the correct nationalities for each situation.
Practice Problems
Problem 4.2.1: Toyota produces a $45,000 Tundra pick-up truck in 2020 but it does not sell until 2021. Show the GDP classification (C,I,G,NX) for both 2020 and 2021.
Answer: 2020: C=$0, I=$45,000, Total=$45,000; 2021: C=$45,000, I=-$45,000, Total=$0
Problem 4.2.2: Samsung produces a $1,100 Galaxy phone in South Korea. Further, assume all components of the phone are manufactured in South Korea as well. The Galaxy phone is then sold in the United States to a household. Show the GDP classification (C,I,G,NX) for both South Korea and the United States.
Answer: South Korea: NX=$1,100, Total=$1,100; United States: C=$1,100, NX=-$1,100, Total=$0
External Resources
No external resources for this section.
4,3 nominal and real gross domestic product
Review Activities
Practice Problems
Problem 4.3.1: The city of Erie produces hotdogs and hamburgers. Below is a table that shows the quantity produced of each good for each year from 2020-2022 in addition to the average price of each good during the given years. Use 2020 as the base year.
| Year | P(Hotdog) | Q(Hotdog) | P(Hamburger) | Q(Hamburger) |
| 2020 | $1.00 | 100 | $2.00 | 50 |
| 2021 | $2.00 | 150 | $2.00 | 100 |
| 2022 | $3.00 | 200 | $4.00 | 100 |
- Calculate the nominal GDP for each year.
- Calculate the real GDP for each year.
- Calculate the GDP deflator for each year. Round to nearest whole value.
- Calculate the inflation rate between 2020 to 2021 as well as the inflation rate from 2021 to 2022. Give to one decimal place.
Answers: $200, $500, $1,000; $200, $350, $400; 100, 143, 250; 43.0%, 74.8%
Problem 4.3.2: An economy produces both guns and roses. Below is the level of production for each year from 2020-2022 in addition to the price of the good in each of the years. Use 2020 as the base year.
| Year | P(Guns) | Q(Guns) | P(Roses) | Q(Roses) |
| 2020 | $5.00 | 100 | $1.50 | 300 |
| 2021 | $5.25 | 120 | $1.50 | 310 |
| 2022 | $5.75 | 120 | $1.75 | 340 |
- Calculate the nominal GDP for each year.
- Calculate the real GDP for each year.
- Calculate the GDP deflator for each year. Round to nearest whole value.
- Calculate the inflation rate between 2020 to 2021 as well as the inflation rate from 2021 to 2022. Give to one decimal place.
Answers: $950, $1,095, $1,285; $950, $1,065, $1,110; 100, 103, 116; 3.0%, 12.6%
Problem 4.3.3: An economy produces apples, bananas, and plums. Below is the level of production for each year from 2020-2022 in addition to the price of the good in each of the years. Use 2020 as the base year.
| Year | P(Apple) | Q(Apple) | P(Banana) | Q(Banana) | P(Cherry) | Q(Cherry) |
| 2020 | $1.00 | 200 | $1.50 | 160 | $3.00 | 50 |
| 2021 | $1.10 | 205 | $1.50 | 180 | $3.50 | 75 |
| 2022 | $1.10 | 220 | $1.75 | 200 | $4.00 | 75 |
- Calculate the nominal GDP for each year.
- Calculate the real GDP for each year.
- Calculate the GDP deflator for each year. Round to nearest whole value.
- Calculate the inflation rate between 2020 to 2021 as well as the inflation rate from 2021 to 2022. Give to one decimal place.
Answers: $590, $758, $892; $590, $700, $745; 100, 108, 120; 8.0%, 11.1%
Problem 4.3.4: The country of Behrendonia produces bagels, cookies, and donuts. Below is a table that shows the quantity produced of each good for each year from 2020-2022 in addition to the average price of each good during the given years. Use 2020 as the base year.
| Year | P(Bagels) | Q(Bagels) | P(Cookies) | Q(Cookies) | P(Donuts) | Q(Donuts) |
| 2020 | $2.00 | 200 | $0.50 | 400 | $1.00 | 350 |
| 2021 | $2.25 | 265 | $0.50 | 450 | $1.25 | 375 |
| 2022 | $2.50 | 290 | $0.75 | 480 | $1.75 | 400 |
- Calculate the nominal GDP for each year.
- Calculate the real GDP for each year.
- Calculate the GDP deflator for each year. Round to nearest whole value.
- Calculate the inflation rate between 2020 to 2021 as well as the inflation rate from 2021 to 2022. Give to one decimal place.
Answers: $950, $1,290, $1,785; $950, $1,130, $1,220; 100, 114, 146; 14.0%, 28.1%
External Resources
Khan Academy: Real GDP and Nominal GDP
Khan Academy: GDP Deflator
Khan Academy: Example Calculating Real GDP with a Deflator
4.4 productivity and the business cycle
Review Activities
Practice Problems
No problems for this section.
External Resources
Khan Academy: Business Cycles
4.5 gdp internationally
Review Activities
Practice Problems
Problem 4.5.1: The GDP of the Czech Republic is 216 billion dollars. The GDP of Luxembourg is 62.4 billion dollars. The population of the Czech Republic is 10.56 million people while the population of Luxembourg is 583,000 people. Calculate the GDP per capita for each country in addition to determining which country has the greater standard-of-living.
Answer: $20,455; $107,033; Luxembourg has the greater standard-of-living
Problem 4.5.2: The GDP per capita of Denmark is $59,795 while the GDP per capita of France is $41,760. The population of Denmark is 5.6 million while the population of France is 67.0 million. Calculate the GDP for each country. Which country produces more? Which country has the greater standard-of-living?
Answer: $334.9 billion; $2.8 trillion; France produces more; Denmark has the greater standard-of-living
External Resources
No external resources for this section.
4.6 gdp as a measure of standard-of-living
Review Activities
Practice Problems
No practice problems for this section.
External Resources
Khan Academy: Limitations of GDP