Mr. Maurer
AP Economics
Name: ________________________
Chapter 25 – GDP – Problem Set #1
_____1. To include the value of the parts used in producing the automobiles turned out during a year in
gross domestic product for that year would be an example of
(a) including a nonmarket transaction
(b) including a nonproduction transaction
(c) including a noninvestment transaction
(d) multiple counting
_____ 2. According to national income accounting, money income derived from the production of this
year’s output is equal to
(a) corporate profits and indirect business taxes
(b) the amount spent to purchase this year’s total output
(c) the sum of interest income and the compensation of employees
(d) gross private domestic investment less the consumption of fixed capital
_____3. Which would be considered an investment according to economists?
(a) the purchase of newly issued shares of stock in Microsoft
(b) the construction of a new computer chip factory by Intel
(c) the resale of stock originally issued by the General Motors Corporation
(d) the sale of a retail department store building by Sears to JCPenny
_____4. A refrigerator was produced by its manufacturer in year 1, sold to a retailer in year 1,
and sold by the retailer to a final consumer in year 2. The refrigerator was
(a) counted as consumption in year 1
(b) counted as savings in year 1
(c) counted as investment in year 1
(d) not included in the gross domestic product of year 1
4a. Explain how the refrigerator from #4 above would be counted in year 2 (do not answer “It
would not be counted”). Explain how the refrigerator would ultimately not add to GDP for year 2.
_____5. If gross domestic investment is greater than depreciation, the economy most likely will be
(a) static
(b) expanding
(c) declining
(d) experiencing inflation
_____6. The annual charge that estimates the amount of capital used up in each year’s production
is called (see the very end of page 551).
_____7. If both nominal gross domestic product and the level of prices are rising, it is evident that
(a) real GDP is constant
(b) real GDP is declining
(c) real GDP is rising, but not as rapidly as prices
(d) no conclusion can be drawn concerning the real GDP of the economy based on this
information.
7a. Explain your reasoning in answering #7 above.
8. Nominal GDP is less than real GDP in an economy in year 1. In year 2, nominal GDP is equal to
real GDP. In year 3, nominal GDP is slightly greater than real GDP. In year 4, nominal GDP is
significantly greater than real GDP. Which year is most likely to be the base year that is being used
to calculate the price index for this economy?
9. Nominal GDP was $3774 billion in year 1 and the GDP deflator was 108 and nominal GDP was
$3989 billion in year 2 and the GDP deflator that year was 112. What was real GDP for each year?
Questions 10, 11, and 12 are based on the following data. To do this, you must know how to
calculate Gross Private Investment (Ig).
Billions of Dollars
Net private domestic investment
$ 32
Personal taxes
39
Transfer payments
19
Indirect business taxes
8
Corporate income taxes
11
Personal consumption expenditures
217
Consumption of fixed capital (depreciation)
7
U.S. exports
15
Dividends
15
Government purchases
51
Net foreign factor income earned in the U.S.
0
Undistributed corporate profits
10
Social Security contributions
4
U.S. Imports
17
10. Calculate gross private domestic investment (This is explained on page 551 of your textbook):
11. Calculate net exports:
12. Calculate GDP using the expenditures approach. Show your work:
13. Total expenditure for a market basket of goods in year 1 (the base year) was $4000 billion. In
year 2, the total expenditure for the same market basket of goods was $4500 billion. What was the
GDP price index for the economy in year 2?
14. Suppose nominal GDP rose from $500 billion to $600 billion while the GDP price index
increased from 125 to 150. What happened to real GDP (decreased, remained constant, increased)
over that time period? Explain your answer?
15. Use the following table of data to calculate GDP using the expenditures method. Show your
work in the area to the right of the table.
Exports
Dividends
Consumption of fixed capital
Compensation of employees
Government purchases
Rents
Indirect business taxes
Gross private domestic investment
Corporate income taxes
Transfer payments
Interest
Proprietors’ income
Personal consumption expenditures
Imports
Social Security contributions
Undistributed corporate profits
Personal taxes
$ (Billions)
$ 367
60
307
1722
577
33
255
437
88
320
201
132
1810
338
148
55
372
16. A farmer owns a plot of ground and sells the right to pump crude oil from his land to a crude
oil producer. The crude oil producer agrees to pay the famer $20 a barrel for every barrel pumped
from the farmer’s land
a. During 2012, 10,000 barrels are pumped.
i. How much does the farmer receive from the crude oil producer?
ii. What is the value added by the farmer?
b. The crude oil producer sells the 10,000 barrels to a petroleum refiner at a price of $25 a
barrel.
i. How much money does the crude oil producer receive form the refiner?
ii. What is the value added by the crude oil producer?
c. The refiner employs a pipeline company to transport the crude oil from the farmer’s land
to the refinery and pays the pipeline company a fee of $1 a barrel to transport the oil.
i. How much money does the pipeline company receive from the refiner?
ii. What is the value added by the pipeline company?
d. From the 10,000 barrels of crude oil, the refiner produces 315,000 gallons of gasoline
and various by-products which are sold to distributors and gasoline serves stations at an average
price of $1 per gallon.
i. The total payment received by the refiner from its customers is _______________
ii. What is the value added by the refiner?
e. The distributors and service stations sell the 315,000 gallons of gasoline and by-products
to consumers at an average price of $1.30 a gallon.
i. How much do the distributors and service stations receive in payment?
ii. What is the value added by the distributors and service stations?
f. The total value added by the farmer, crude oil producer, pipeline company, refiner, and
distributors and service stations is how much?
g. What is the market value of the gasoline and by-products sold as final products to
consumers?
17. The following is hypothetical data for a market basket of goods in an economy:
Year 1 (base year):
Products
Quantity
Price
Expenditures
Toys
3
$10
$ _________
Pencils
5
2
$ _________
Books
7
5
$ _________
Total
$ _________
Year 2:
Products
Quantity
Price
Expenditures
Toys
3
$11
$ _________
Pencils
5
3
$ _________
Books
7
6
$ _________
Total
$ _________
In the space below, calculate the GDP price index for Year 2.
18. The following table shows nominal GDP figures for 3 years and the price indices for each year
(GDP figures are in billions).
Year
Nominal GDP
Price Index
Real GDP
1929
$104
121
$ _______
1933
56
91
$ _______
1939
91
100
$ _______
a. Use the price indices to compute the real GDP in each year. (You may round answers to
the nearest billion dollars.)
b. Which of the 3 years appears to be the base year? Explain.
c. Between 1929 and 1933, did the economy experience inflation or deflation? Explain.
d. Between 1933 and 1939, did the economy experience inflation or deflation? Explain.
e. For each year in the table, was the nominal GDP figure deflated, inflated, or neither to
calculate real GDP?
1929
1933
1939