Social Studies: AP Macroeconomics: GDP and National Income
Measuring output, income, and economic performance
Social Studies: AP Macroeconomics: GDP and National Income
Measuring output, income, and economic performance
Social Studies - Grade 9-12
- 1
An economy has consumption spending of 900 billion dollars, investment spending of 250 billion dollars, government purchases of 300 billion dollars, exports of 120 billion dollars, and imports of 180 billion dollars. Calculate GDP using the expenditure approach.
Imports are subtracted because they are included in spending but were not produced domestically.
GDP equals C + I + G + (X - M), so GDP equals 900 + 250 + 300 + (120 - 180) = 1,390 billion dollars. - 2
For each transaction, state whether it is included in current U.S. GDP and explain why: a used car sold from one household to another, a new car produced in Tennessee and sold to a household, tires sold to an auto factory, and a haircut purchased at a local salon.
GDP counts final goods and services produced within a country during a specific time period.
The used car sale is not included because it was not produced this year. The new car is included as consumption because it is a final good produced domestically. The tires sold to an auto factory are not counted separately because they are intermediate goods. The haircut is included because it is a final service produced in the current year. - 3
A farmer sells wheat to a mill for 1 dollar, the mill sells flour to a bakery for 2 dollars, and the bakery sells bread to a household for 5 dollars. Calculate the total contribution to GDP using the final goods method and the value-added method.
Using the final goods method, the contribution to GDP is 5 dollars because only the final bread is counted. Using the value-added method, the contribution is 1 dollar from the farmer, 1 dollar from the mill, and 3 dollars from the bakery, for a total of 5 dollars. - 4
A small economy produces only burgers and fries. In 2023, it produces 100 burgers at 5 dollars each and 200 fries at 2 dollars each. In 2024, it produces 110 burgers at 6 dollars each and 220 fries at 3 dollars each. Using 2023 as the base year, calculate nominal GDP in 2024, real GDP in 2024, and the GDP deflator for 2024.
Nominal GDP uses current-year prices, while real GDP uses base-year prices.
Nominal GDP in 2024 is 110 times 6 plus 220 times 3, which equals 1,320 dollars. Real GDP in 2024 using 2023 prices is 110 times 5 plus 220 times 2, which equals 990 dollars. The GDP deflator is 1,320 divided by 990 times 100, which is about 133.3. - 5
If nominal GDP is 22 trillion dollars and real GDP is 20 trillion dollars, calculate the GDP deflator and interpret what it means relative to the base year.
The GDP deflator equals nominal GDP divided by real GDP times 100, so it equals 22 divided by 20 times 100 = 110. This means the overall price level is 10 percent higher than in the base year. - 6
An economy has GDP of 5,000 billion dollars and depreciation of 600 billion dollars. Calculate net domestic product.
Depreciation measures the value of capital that wears out during production.
Net domestic product equals GDP minus depreciation, so NDP equals 5,000 - 600 = 4,400 billion dollars. - 7
Assume no statistical discrepancy. An economy has GDP of 2,000 billion dollars, depreciation of 200 billion dollars, net foreign factor income of 50 billion dollars, and indirect business taxes of 150 billion dollars. Calculate national income.
A common AP sequence is GDP to GNP to NNP to national income.
First, GNP equals GDP plus net foreign factor income, so GNP equals 2,050 billion dollars. Next, NNP equals GNP minus depreciation, so NNP equals 1,850 billion dollars. National income equals NNP minus indirect business taxes, so national income equals 1,700 billion dollars. - 8
A country has national income of 8,000 billion dollars, retained corporate profits of 400 billion dollars, corporate income taxes of 300 billion dollars, social insurance contributions of 500 billion dollars, transfer payments of 900 billion dollars, interest on government debt of 100 billion dollars, and personal taxes of 1,200 billion dollars. Calculate personal income and disposable income.
Disposable income is the income households have after personal taxes are paid.
Personal income equals 8,000 - 400 - 300 - 500 + 900 + 100 = 7,800 billion dollars. Disposable income equals personal income minus personal taxes, so disposable income equals 7,800 - 1,200 = 6,600 billion dollars. - 9
A U.S.-owned company produces 50 billion dollars of output in Mexico, and a Japanese-owned company produces 30 billion dollars of output in the United States. Explain how these transactions affect U.S. GDP and U.S. GNP.
The Japanese-owned company's production in the United States is included in U.S. GDP because it occurs inside U.S. borders. The U.S.-owned company's production in Mexico is included in U.S. GNP because it is earned by U.S. residents. In this example, U.S. GNP is 20 billion dollars higher than U.S. GDP because 50 billion is added and 30 billion is subtracted. - 10
A computer factory produces 100 computers this year. It sells 80 computers to households for 1,000 dollars each and keeps 20 computers in inventory at the same market value. How much does this production add to GDP, and which expenditure categories are affected?
Inventory changes are counted as investment spending.
The production adds 100,000 dollars to GDP because all 100 computers were produced this year. The 80 computers sold to households count as 80,000 dollars of consumption, and the 20 computers added to inventory count as 20,000 dollars of investment. - 11
Identify two types of economic activity that GDP does not fully measure. Explain why this makes GDP an imperfect measure of well-being.
GDP does not fully measure nonmarket work, such as unpaid childcare, and underground market activity, such as unreported cash transactions. This makes GDP imperfect because useful production and income can be missing from the official total. GDP also does not directly measure quality of life, income distribution, or environmental costs. - 12
In a simple circular flow model, households provide labor to firms and receive wages. Firms sell goods and services to households and receive consumer spending. Identify the income flow and the output flow in this model.
In the circular flow model, one person's spending becomes another person's income.
The income flow is the wages paid by firms to households in exchange for labor. The output flow is the goods and services sold by firms to households. - 13
Country A has GDP of 1.2 trillion dollars and a population of 300 million people. Country B has GDP of 800 billion dollars and a population of 100 million people. Calculate GDP per capita for each country and state which country has the higher GDP per capita.
GDP per capita equals total GDP divided by population.
Country A's GDP per capita is 1.2 trillion dollars divided by 300 million people, which equals 4,000 dollars per person. Country B's GDP per capita is 800 billion dollars divided by 100 million people, which equals 8,000 dollars per person. Country B has the higher GDP per capita. - 14
A country's real GDP rises from 2,500 billion dollars to 2,650 billion dollars. Its population rises from 100 million to 104 million. Calculate the growth rate of real GDP and describe what happened to real GDP per capita.
The real GDP growth rate is (2,650 - 2,500) divided by 2,500 times 100, which equals 6 percent. Real GDP per capita rises from 25,000 dollars to about 25,481 dollars, so real GDP per capita increased by about 1.9 percent. - 15
A state government pays 500 million dollars in unemployment benefits and buys 700 million dollars of new computers for public schools. Explain how each action affects GDP directly.
Transfer payments redistribute income but are not counted as government purchases in GDP.
The 500 million dollars in unemployment benefits does not directly increase GDP because it is a transfer payment, not a purchase of a newly produced good or service. The 700 million dollars spent on new computers directly increases GDP as government purchases.