Exercises: Macroeconomic aggregates: GDP and its measurement

Define a country's GDP taking care to include these four ideas: it is a market value, it counts only final goods and services, it is produced within the country, and it refers to a given time period. Explain, using the chain wheat → flour → bread, why only final goods count.

State whether each activity is included in GDP and justify your answer: a dinner at a restaurant, the same dinner cooked at home, a new car, the resale of a used car, the work of a plumber paid cash under the table without an invoice, and the vegetables two neighbors swap from their vegetable gardens.

The figure shows the composition of GDP in the imaginary country Meridia according to the expenditure method, in billions of dollars: household consumption (C), business investment (I), government spending (G) and net exports (X−M), but the value of this last bar is missing.

1. a) Calculate Meridia's net exports knowing that its GDP is $100,000$ million dollars.
2. b) Does Meridia have a trade surplus or a trade deficit in its foreign trade? Interpret the result.

A country only produces sacks of apples. In 2024 it produces $100$ sacks, which sell at $\$1$ per sack; in 2025 it produces the same $100$ sacks, but the price rises to $\$1.10$.

1. a) Calculate the nominal GDP of each year and its rate of change.
2. b) Calculate the real GDP of 2025 at 2024 prices and explain what has happened to the country's output.
3. c) Using this example, explain the difference between nominal GDP and real GDP.

Two countries have the same GDP, $400,000$ million dollars, but the first has $10$ million inhabitants and the second, $25$ million.

1. a) Calculate the GDP per capita of each one.
2. b) Explain what GDP per capita measures and why it is used to compare living standards between countries.

A carpenter buys wood from the sawmill for $\$30$ and uses it to make a table that he sells for $\$150$. The sawmill had bought the log from a forester for $\$10$.

1. a) Calculate the value added at each stage (forester, sawmill, carpenter).
2. b) Add the values added and check that the total matches the final price of the table.

GDP does not capture everything produced in a country. Explain which three big blocks of activity are left out (unpaid household and care work, the underground economy, and volunteering) and give an example of each, different from those seen in class.

State whether these transactions form part of GDP and justify your answer: buying shares in a company on the stock market, the pension received by a retired woman, the sale of a used apartment built $30$ years ago, and the fees of the real estate agency that brokered that sale.

In the imaginary country Briga, in one year: household consumption was $60,000$ million dollars, business investment was $15,000$ million, government spending was $20,000$ million, exports were $18,000$ million and imports were $13,000$ million.

1. a) Calculate Briga's GDP using the expenditure method, $\text{GDP} = C + I + G + X - M$.
2. b) Calculate what percentage of GDP consumption represents and comment on its importance for the country's economy.

In Dayton, the bread supply chain produces the following sales figures: the farmer sells wheat to the mill for $\$100$, the mill sells flour to the bakery for $\$260$, and the bakery sells bread to consumers for $\$500$.

1. a) Calculate the value added at each stage of the chain.
2. b) Sum the values added and verify that it matches the value of the final bread. Explain why the three sales figures cannot be added together to measure output.

A country's GDP was $200,000$ million dollars in 2024 and $210,000$ million in 2025, measured at current prices for each year. In 2025, prices rose by $4\ \%$.

1. a) Calculate the rate of change of nominal GDP.
2. b) Estimate the rate of change of real GDP by adjusting for price increases, and explain, using these figures, the difference between nominal GDP and real GDP.

In Arta, in one year: household consumption was $40,000$ million dollars, investment was $12,000$ million, government spending was $15,000$ million, exports were $10,000$ million and imports were $14,000$ million.

1. a) Calculate Arta's GDP using the expenditure method.
2. b) Calculate the balance of net exports and explain its sign.
3. c) Explain what would happen to GDP if, everything else staying the same, households decided to save more and consume $2,000$ million less.

The frozen pizza chain produces these sales figures: the farmer sells the milk to the cheese maker for $\$80$, the cheese maker sells the cheese to the pizza factory for $\$190$, and the factory sells the pizzas to supermarkets for $\$420$.

1. a) Calculate the value added at each stage.
2. b) Check that the sum of the values added matches the final value and calculate what inflated figure would result from adding the three sales together.
3. c) Explain why GDP uses value added and not total sales.

Meridia's nominal GDP is $330,000$ million dollars and its real GDP is $300,000$ million.

1. a) Calculate the GDP deflator, $\text{Deflator} = \frac{\text{nominal GDP}}{\text{real GDP}} \times 100$.
2. b) Interpret the result: how much have prices risen since the base year?
3. c) Explain the difference between the GDP deflator and the CPI as measures of prices.

Briga's real GDP rises from $500,000$ million dollars to $515,000$ million in one year, while its population rises from $25$ to $25.25$ million residents.

1. a) Calculate the real GDP per capita for each year.
2. b) Calculate the rate of change of real GDP and of real GDP per capita.
3. c) Explain why, when measuring the improvement in the average standard of living, the per capita figure matters more than the total.

Classify each item of spending into its GDP component (consumption C, investment I, government spending G or net exports X−M) and justify your choice: a household buys a newly built apartment, the city pays the salaries of its firefighters, a company buys an industrial warehouse, a German tourist pays for a week's hotel in Miami and an American company buys computers imported from Taiwan.

A preliminary report from the Meridia research department presents the following macroeconomic data for the last fiscal year (in millions of dollars):

• Gross total output of all sectors: $180,000$; Declared intermediate consumption: $85,000$.

• Compensation of employees: $52,000$; Gross Operating Surplus and mixed income: $43,000$.

• Final household consumption expenditure: $58,000$; Gross business investment: $17,000$; Government consumption: $21,000$; Exports: $24,000$; Imports: $20,000$.

In addition, an analyst claims that GDP should be $8,000$ million higher because used homes worth $5,000$ million were sold that year and households purchased shares on the stock exchange worth $3,000$ million.

1. a) Calculate GDP using the three approaches (output, income, and expenditure) and determine whether the report's data show accounting consistency or if there is a discrepancy in the recording of expenditure.
2. b) Provide a reasoned refutation of the analyst's proposal: explain why transactions of used homes and stock market operations should not be counted as higher GDP for the year.
3. c) If a construction company buys concrete for $200$ million to build an industrial warehouse valued at $1,000$ million that it sells to a local factory, describe exactly how this transaction is recorded in each of the three approaches to avoid double counting.

The following annual data (in billions of dollars) are available for the economy of Briga:

• Sum of the gross value added of all sectors: $250,000$.

• Compensation of employees: $130,000$; Gross operating surplus / mixed income: $120,000$.

• Final consumption expenditure of households ($C$): $150,000$; Gross investment ($I$): $50,000$; Government consumption ($G$): $60,000$; Exports of goods and services ($X$): $30,000$.

• Tax revenue net of transfers and subsidies ($T$): $48,000$.

1. a) Calculate GDP using the output (production) and income approaches, and deduce the volume of imports ($M$) required to balance the expenditure approach. Interpret the trade balance of Briga.
2. b) Calculate the private saving of the economy ($S = Y - T - C$, assuming that GDP equals national disposable income) and the budget balance of the public sector ($T - G$).
3. c) Check whether the macroeconomic identity $(S - I) + (T - G) = X - M$ holds. Based on the result, explain how Briga's private, public, and external sectors finance each other, and determine whether the country has net lending or net borrowing with the rest of the world.

In the debate on the state of Arta's economy, the government's congressional spokesperson proclaims: "In 2025 our economy grew by a magnificent $7.41\,\%$, comfortably surpassing the previous year's growth and allowing households to gain purchasing power thanks to an average wage increase of $4\,\%$"

Data from the National Statistics Institute (in billions of dollars) are:

• 2023 (base year): Nominal GDP $200,000$; Real GDP $200,000$.

• 2024: Nominal GDP $216,000$; Real GDP $208,000$.

• 2025: Nominal GDP $232,000$; Real GDP $212,000$.

1. a) Calculate the growth rates of nominal GDP and real GDP in both 2024 and 2025. Identify the intentional conceptual error in the spokesperson's speech.
2. b) Calculate the GDP deflator for 2024 and 2025, find the implicit inflation rate in 2025, and demonstrate numerically whether households gained or lost real purchasing power compared to the $4\,\%$ wage increase.
3. c) If for 2026 analysts forecast a $1\,\%$ drop in real GDP accompanied by an inflation rate (according to the deflator) of $4.5\,\%$, predict the value that nominal GDP would reach in 2026 and describe the resulting macroeconomic scenario (stagflation).

Briga's research department has the following macroeconomic data for 2024 (in billions of dollars): $C = 70,000$, $I = 20,000$, $G = 25,000$, $X = 22,000$, and $M = 27,000$.

For 2025, the federal government publishes that nominal GDP amounted to $121,000$ billion dollars and that household consumption expenditure increased by $8\,\%$ in nominal terms. Meanwhile, the statistics bureau calculates that total final output for 2025 valued at 2024 prices was $115,500$ billion dollars.

1. a) Calculate GDP for 2024 and determine the nominal and real growth rates of the economy in 2025. Explain what percentage of nominal growth corresponds to additional physical output and how much is merely price increases.
2. b) Obtain the GDP deflator for 2025 and determine the accumulated inflation rate. Based on this, calculate whether household consumption actually increased in terms of physical goods or if money illusion occurred.
3. c) Looking ahead to 2026, the Treasury Department projects that real GDP will grow by $2.5\,\%$ and the Federal Reserve estimates inflation of $3\,\%$. Predict the figure that nominal GDP should reach in 2026 if both forecasts are met.