Chapter 22 — Exercises
Section A — Computing GDP
A1. A simple economy produces only two goods: pizza and textbooks. In Year 1: 100 pizzas at $10 each, 50 textbooks at $40 each. In Year 2: 110 pizzas at $12 each, 55 textbooks at $44 each. Compute nominal GDP for each year and the growth rate.
A2. Using Year 1 as the base year, compute real GDP in Year 2. How does the real growth rate compare to the nominal growth rate? What accounts for the difference?
A3. Compute the GDP deflator for Year 2 using the numbers from A1–A2.
A4. U.S. GDP in 2024 was approximately $28.3 trillion. The population was about 335 million. What was GDP per capita?
A5. Classify each of the following as C, I, G, or NX (or "not counted in GDP"): - (a) You buy a new laptop for personal use - (b) A firm buys a new computer server - (c) The government builds a highway - (d) You buy a used car from your neighbor - (e) A U.S. firm exports machinery to Germany - (f) You receive a Social Security check - (g) A developer builds a new apartment building - (h) You cook dinner at home for your family - (i) A Japanese tourist buys a souvenir in New York - (j) A U.S. company builds a factory in Mexico
Section B — Real vs. nominal
B1. Nominal GDP rose from $20T to $22T (a 10% increase). Inflation over the same period was 4%. What was the approximate real GDP growth rate?
B2. If the GDP deflator is 130 (base year = 100) and nominal GDP is $26T, what is real GDP?
B3. "GDP grew 5% last year." Is this real or nominal? Why does the distinction matter?
B4. China's nominal GDP has been growing at about 8% per year, but inflation has been about 2%. What is China's approximate real GDP growth rate?
Section C — What GDP misses
C1. A parent who was staying home to raise children returns to work and hires a nanny. What happens to GDP? Did the amount of childcare change?
C2. A factory produces $10M of goods and causes $3M of environmental damage. What does GDP record? What does the GPI record?
C3. Country A has GDP per capita of $60,000 and a Gini of 0.45. Country B has GDP per capita of $40,000 and a Gini of 0.25. Which country's typical citizen is probably better off? Why can't GDP alone answer this?
C4. Americans work about 1,800 hours per year; Germans work about 1,350. U.S. GDP per capita is higher. Is the U.S. actually richer? What if you measured GDP per hour worked?
C5. Google Search is free to users but generates enormous value. Estimate (very roughly) the value of Google Search to you personally per year. How much of this shows up in GDP?
Section D — Alternative measures
D1. Look up the HDI rankings for three countries of your choice. Compare their HDI rank to their GDP per capita rank. Which countries perform better on HDI than GDP? Which perform worse? Why?
D2. "GDP has been rising for 50 years but the GPI has been flat or declining since the 1970s." If true, what does this tell us about the relationship between market production and wellbeing?
D3. Bhutan uses "Gross National Happiness" instead of GDP as its primary national indicator. Apply the critique from §22.5: what does GNH capture that GDP doesn't? What does GDP capture that GNH doesn't?
Section E — COVID and GDP
E1. Look up U.S. real GDP (FRED series GDPC1) from Q4 2019 through Q4 2021. Verify the Q2 2020 contraction and the speed of recovery. When did real GDP return to its pre-pandemic level?
E2. The GDP story of COVID says "the economy fell then recovered." But the K-shaped recovery (Chapter 13) says the recovery was deeply unequal. Why can't GDP tell you about the K shape?
E3. During COVID, government spending (G) increased enormously (stimulus, PPP, enhanced unemployment). What effect did this have on measured GDP? Was the GDP number misleading?
Section F — Reading a GDP report
F1. Find the most recent BEA GDP release (bea.gov). What was the annualized real GDP growth rate? What components (C, I, G, NX) contributed most to growth?
F2. Were there revisions to the previous quarter? By how much?
F3. Write a one-paragraph "honest summary" of the GDP report — more informative than the typical news headline.
Section G — Policy debate
G1. "We should replace GDP with the GPI as our primary economic indicator." Make the strongest case for and against.
G2. "GDP growth is the most important policy goal." Evaluate using what you know about what GDP misses.
G3. "Environmental regulation reduces GDP." Apply §22.5: does reducing pollution reduce GDP? Does reducing GDP reduce welfare?
Section H — Reflection
- Before this chapter, did you think of GDP as "how well the economy is doing"? Has your view changed?
- Which of the six things GDP misses do you think is most important?
- If you could design one alternative to GDP, what would it measure?
Selected answers in appendices/answers-to-selected.md.