ACTIVITY 1: Components of GDP Which component of GDP would each of these fit into? 1. Mechanic fixes a transmission 2. A business purchases computer software and a PC 3. A local library purchases new audio books 4. A retailer purchases tennis shoes from a manufacturer in China and sells them 5. Mother purchases those tennis shoes from the retailer Write one more example of each of the four components. 6. Consumption 7. Investment 8. Government spending 9. Net exports 10. Explain why the sale of used goods is not included in GDP.
ACTIVITY 1: Components of
1. Mechanic fixes a transmission
2. A business purchases computer software and a PC
3. A local library purchases new audio books
4. A retailer purchases tennis shoes from a manufacturer in China and sells them
5. Mother purchases those tennis shoes from the retailer Write one more example of each of the four components.
6. Consumption
7. Investment
8. Government spending
9. Net exports
10. Explain why the sale of used goods is not included in GDP.
ACTIVITY 2: Nominal and real GDP You are an economist who has been asked to calculate your nation’s GDP, which produces only three goods/services.
Calculate nomincal GDP for Year 1 and Year 2. GDP = price x quantity.
Year 1 Nominal GDP Year 2 Nominal GDP Price Quantity GDP Price Quantity GDP Oil changes $15 5 $75 Oil changes $18 6 $108 Hamburgers $2 20 $40 Hamburgers $3 25 $75 MP3 players $150 3 $450 MP3 players $175 5 $875 Total $565 Total $1,058
11. By how much has GDP increased from Year 1 to Year 2? Now calculate Year 2 real GDP using Year 1 as the base year. Year 2 Real GDP Price Quantity GDP Oil changes $15 6 $90 Hamburgers $2 25 $50 MP3 players $150 5 $750 Total $890
12. By how many dollars was nominal GDP overstating GDP in Year 2?
13. How much has real GDP increased from Year 1 to Year 2?
14. Why is it important to adjust nominal GDP for inflation?
ACTIVITY 3: Other Measures of Standard of Living Economists often use real GDP over the long run to understand changes in a nation’s economic growth. Real GDP tends to increase as a nation’s standard of living improves; however, GDP does not capture some very important social measures. For example, other factors that can give insight into a population’s well-being are income distribution, the literacy rate, the mortality rate, and life expectancy.
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