Mr. MaurerName: ______
AP Economics
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.
In year two it would be counted as a personal consumption expenditure when it was sold to a consumer, but it would be subtracted as a decline in inventory, canceling the expenditure out.
_____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).Depreciation
_____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.
It may be that output is increasing, or it may just be that prices are increasing. You would have to know if the growth in nominal GDP was greater than the growth in the price index.
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?
Year 2 – nominal and real GDP are always the same in the base year.
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?
Year 1 Real GDP = $3494 Billion. Year 2 Real GDP = 3562 Billion
Questions 10, 11, and 12 are based on the following data. To do this, you must know how to calculate Gross Private Investment (Ig).
Billions of Dollars
Net private domestic investment$ 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):
$39 billion.
11. Calculate net exports:$-2 billion
12. Calculate GDP using the expenditures approach. Show your work:
C (217 billion) + Ig (39 billion) + G (51 billion) + Xn (-2 billion) = $305 billion
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?
Price index = 4500/4000 x 100 = 113 (really 112.5)
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?
Real GDP stayed constant as both nominal GDP and the price index increased 20%.
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.
$ (Billions)
Exports$ 367
Dividends 60
Consumption of fixed capital 307
Compensation of employees 1722
Government purchases 577
Rents 33
Indirect business taxes 255
Gross private domestic investment 437
Corporate income taxes 88
Transfer payments 320
Interest 201
Proprietors’ income 132
Personal consumption expenditures 1810
Imports 338
Social Security contributions 148
Undistributed corporate profits 55
Personal taxes 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?
$200,000
ii. What is the value added by the farmer?
$200,000
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?
$250,000
ii. What is the value added by the crude oil producer?
$50,000
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?
$10,000
ii. What is the value added by the pipeline company? $10,000
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 __$315,000_____
ii. What is the value added by the refiner? $55,000
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?
$409,500
ii. What is the value added by the distributors and service stations?
$94,500
f. The total value added by the farmer, crude oil producer, pipeline company, refiner, and distributors and service stations is how much?
$409,500
g. What is the market value of the gasoline and by-products sold as final products to consumers? $409,500
17. The following is hypothetical data for a market basket of goods in an economy:
Year 1 (base year):
ProductsQuantity PriceExpenditures
Toys 3$10$ __30______
Pencils 5 2$ __10______
Books 7 5$ __35______
Total$ __75______
Year 2:
ProductsQuantity PriceExpenditures
Toys 3$11$ __33_____
Pencils 5 3$ __15_____
Books 7 6$ __42_____
Total$ __90_____
In the space below, calculate the GDP price index for Year 2.
90 ÷ 75 x 100 = 120
18. The following table shows nominal GDP figures for 3 years and the price indices for each year (GDP figures are in billions).
YearNominal GDPPrice IndexReal GDP
1929$104121$ _86______
1933 56 91$ _62____
1939 91100$ _91______
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.
1939, the price index is 100 and nominal GDP = Real GDP
c. Between 1929 and 1933, did the economy experience inflation or deflation? Explain.
Deflation. The price index is lower for 1933 than for 1929.
d. Between 1933 and 1939, did the economy experience inflation or deflation? Explain.
Inflation. The price index is higher for 1939 than for 1933.
e. For each year in the table, was the nominal GDP figure deflated, inflated, or neither to calculate real GDP?
1929 - Deflated
1933 - Inflated
1939 - Neither