AP Economics:
Economic Measurement Review FRQs
May 5, 2015
Economic Measurement FRQs
1. Assume a market economy with a business sector, a household sector, and a
government sector, but no international sector.
a) Draw and label a circular flow diagram for this economy
or
Correct labels for sectors (households, business or firms,
government, etc if included) and for markets: (product, factor);
direction of flow of goods and services, factors (resources) and
money payments
b) Referring to the diagram you have drawn in part a), identify two
ways of calculating this economy’s gross domestic product (GDP).
Expenditure method: C + I + G (or XN if included)
Income method: wages and salaries + interest + profits and rent
c) Identify each of the following:
i) the components of aggregate demand C + I + G (or XN if
included)
ii) the determinants of aggregate supply
resources and productivity or labor demand, labor supply and
production function or input prices, productivity, taxes and
gov’t regulation
2. Assume an open economy with a public sector.
a) Identify two methods of calculating gross domestic product for
this economy.
Expenditure method: C + I + G (or XN if included)
Income method: wages and salaries + interest + profits and rent
b) Explain why the two methods you identified in part a) must yield
the same value of gross domestic product. Circular Flow: no
leakages; expenditures = income flows
c) Identify one shortcoming of using gross domestic product as an
indicator of the actual level of national output. Does not include
underground economy, home production, barter or externalities
d) If nominal gross domestic product increased by 4 percent in 1996,
identify two additional pieces of information you need before you
can conclude that the living standard of the typical person
increased by 4 percent during the year. Change in population;
change in price levels
also acceptable were changes in
income distribution, changes in externalities, changes in product
quality and changes in leisure time