Unit 2: Measuring a Nation's Output
The circular flow, the three ways to add up everything a country produced this year, and why the resulting number can rise without anyone being better off.
8 topics · 31 questions
Each topic is a path, not a menu: work down it in order and every question builds on the one above. Click any of them to watch the answer draw itself.
The Circular Flow of Income and Spending
- How it worksWalk me through the loop of money running between households and firms through goods markets and factor markets.
- Going furtherWhat happens to the circular flow once government and foreign buyers are added onto the two original loops?
- Common mistakeWhy doesn't money that a household saves instead of spends simply vanish from the economy?
- Ties togetherHow does the circular flow explain why measuring GDP by spending and measuring it by income land on the same total?
Your turn1 of 2
A household earns 83928 dollars this year, pays 10596 dollars in taxes, and spends 48983 dollars on goods and services. How much does it save?What Counts in GDP and What Doesn't
- How it worksHow does counting only final goods keep the same steel from being counted three times as it moves through production?
- Worked exampleFind GDP when a lumber mill sells 30, a furniture maker sells 90, and a store sells 150 dollars worth of finished chairs.
- Common mistakeWhy doesn't the stock market climbing 20 percent in a year add anything directly to GDP?
- Going furtherWhat happens to measured GDP the moment a family stops paying a cleaner and starts cleaning their own house?
Your turn1 of 2
A lumber mill sells 20 dollars of lumber to a furniture maker, who uses it to make furniture selling for 46 dollars to a retailer, who sells finished chairs to shoppers for 117 dollars. How much does this chain of production add to GDP?The Expenditure Approach to GDP
- How it worksWalk me through what lands in consumption, investment, government purchases, and net exports over one year.
- Worked exampleFind GDP when consumption is 12 trillion, investment is 3.5 trillion, government purchases are 4 trillion, exports are 2 trillion, and imports are 2.8 trillion dollars.
- Common mistakeWhy doesn't buying a share of stock or a government bond count as investment inside GDP?
- Going furtherWhat happens to measured GDP when firms build up inventory of goods they could not sell this quarter?
Your turn1 of 2
Find GDP when consumption is 14 trillion, investment is 4 trillion, government purchases are 6 trillion, exports are 1.92 trillion, and imports are 2 trillion dollars.The Income Approach and Value Added
- How it worksHow does the value added at each stage of production sum up to the final selling price of a good?
- Worked exampleFind the value added at each stage of production when raw cotton sells for 10, fabric for 28, and a finished shirt for 45 dollars.
- Common mistakeWhy isn't GDP simply the total amount of money that changed hands in a country this year?
- Going furtherWhat happens on the income side of the national accounts when a corporation pays its profits out as dividends?
Your turn1 of 2
Find the value added at the final stage of production when raw cotton sells for 12 dollars, fabric made from it sells for 30 dollars, and a finished shirt made from that fabric sells for 58 dollars.GDP, GNP, and the Difference Location Makes
- How it worksHow does GNP add income earned by citizens abroad and subtract income foreigners earn domestically to get a different total than GDP?
- Worked exampleFind GNP for a country with GDP of 20 trillion dollars, 300 billion earned by its citizens abroad, and 150 billion earned domestically by foreigners.
- Common mistakeWhy isn't GDP simply a measure of how much a country's own citizens and companies earned this year?
- Going furtherWhat happens to the gap between GDP and GNP for a country whose companies own factories all over the world?
Your turn1 of 2
Find GNP, in billion dollars, for a country with GDP of 21964 billion dollars, 395 billion dollars earned by its citizens abroad, and 286 billion dollars earned domestically by foreigners.Nominal GDP, Real GDP, and the GDP Deflator
- How it worksHow does holding every price at a fixed base year separate real growth in output from growth in the price level?
- Worked exampleFind real GDP when nominal GDP is 25 trillion dollars and the GDP deflator is 125.
- Worked exampleFind the GDP deflator when nominal GDP is 900 billion dollars and real GDP is 750 billion dollars.
- Common mistakeWhy isn't the gap between real and nominal GDP explained by a country's population growing?
Your turn1 of 2
Find real GDP when nominal GDP is 25 trillion dollars and the GDP deflator is 128.Chained Dollars and the Base-Year Problem
- How it worksHow does chaining prices together from each pair of neighboring years fix the distortion a fixed base year creates?
- Common mistakeWhy isn't the GDP deflator just another name for the consumer price index?
- Going furtherWhat happens to measured real growth rates when a country's official base year is 30 years out of date?
Your turn1 of 2
A student conflates the GDP deflator with the consumer price index, assuming they are just two names for the same inflation measure. What is the key difference between them?The Limits of GDP as a Measure of Well-Being
- How it worksHow do unpaid household work and the underground economy slip straight through the GDP measurement net?
- Common mistakeWhy isn't a higher GDP automatically the same thing as a higher standard of living?
- Going furtherWhat happens to measured GDP when a hurricane flattens a city and the country spends billions rebuilding it?
- Ties togetherHow does dividing GDP by population fix part of the well-being problem and still leave the rest of it unsolved?
Your turn1 of 2
A country's GDP rises significantly this year. A commentator concludes this automatically means the average person's standard of living improved. What is the flaw in this conclusion?