GDP: Measuring an Economy and What It Misses · seed 1 · A4, ink-friendly. The answer key prints on its own page for grown-ups.

What GDP counts and what it cannot see

Civics & Economics · Economics · ages 15-16
Name ______________________   Date ____________

  1. Which list gives the four categories in GDP's spending approach?

    • Consumption, investment, government purchases, net exports
    • Consumption, financial asset trades, cash transfers, gross exports
    • Consumption, investment, government transfers, total imports

  2. In a domestic production chain, a baker buys flour for 1 coin, uses it to make bread, and sells that bread to a household for 3 coins in the same year. What is this chain's contribution to GDP?

    • 4 coins, adding the flour sale to the final bread sale.
    • 3 coins, counting the final bread's value once.
    • 1 coin, counting the flour but excluding the bread sale.

  3. Real GDP adjusts for price changes so changes in output can be compared across years.

    Circle one:   True   False

  4. A town buys 100 coins of newly produced domestic oil-spill cleanup services this year. All other domestic output is unchanged. Compared with the same economy without those services, what is the effect on GDP?

    • GDP is 100 coins lower because the cleanup repairs environmental harm.
    • GDP is unchanged because restoring damage never counts as output.
    • GDP is 100 coins higher than it would be without the cleanup.

  5. For the same year, A has GDP of 180 coins and 30 people; B has GDP of 120 coins and 15 people. Units and price levels are comparable. Which comparison of GDP per head is valid?

    • A: 6; B: 8. Every person receives their country's average.
    • A: 6; B: 8. The averages do not show income inequality.
    • A: 30; B: 15. The populations show output per person.

  6. A government is choosing a school policy. Which use of GDP recognizes its limits?

    • Choosing school policy using GDP and learning outcomes.
    • Treating GDP growth alone as proof every pupil learned more.
    • Treating school spending alone as proof every pupil can read.

  7. GDP per head rises during a boom. Top earners' incomes double, while most workers' wages stay unchanged. Why does the GDP-per-head increase not prove that most workers gained?

    • The average can rise while most wages stay unchanged.
    • The average rising means each person's wage rose equally.
    • The average rising means no income inequality remains.

  8. A country's real GDP grows 4 percent. During the same year, river pollution worsens and people have less free time. Which conclusion is supported?

    • Everyone's wellbeing improved because real GDP rose that year.
    • Output increased, but wellbeing may have worsened.
    • Output must have fallen because river pollution became worse.
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Answer key

For grown-ups. Fold this page away before handing over the rest.

What GDP counts and what it cannot see W1-mt_JFm9bVs0_n-s1

  1. Consumption, investment, government purchases, net exports · The categories are consumption, investment, government purchases, and net exports. Net exports means exports minus imports.
  2. 3 coins, counting the final bread's value once. · The final bread is worth 3 coins. Its value includes the flour, so adding the flour again would double count it.
  3. True · Real GDP removes the effect of changing prices. A nominal increase caused only by higher prices is not real output growth.
  4. GDP is 100 coins higher than it would be without the cleanup. · The new domestic services add 100 coins of output. With other output unchanged, GDP is 100 coins higher. This does not make the spill beneficial.
  5. A: 6; B: 8. The averages do not show income inequality. · A has 180 / 30 = 6 coins per head; B has 120 / 15 = 8. These averages do not show how incomes are shared.
  6. Choosing school policy using GDP and learning outcomes. · GDP measures output, not what pupils learned. Learning outcomes provide evidence needed for a school-policy decision.
  7. The average can rise while most wages stay unchanged. · GDP per head does not show income distribution. Its increase cannot establish that most workers received higher wages.
  8. Output increased, but wellbeing may have worsened. · Real GDP growth indicates increased output. Pollution and reduced leisure can harm wellbeing without being subtracted from GDP.
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