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3.5 End-of-Chapter Material

In Conclusion

Understanding the meaning and measurement of macroeconomic variables is vital for your ability to evaluate the abundance of information you receive through various forms of the media about the state of the aggregate economy. The difficulties faced by the team of International Monetary Fund (IMF) economists with which we opened the chapter are not that different from the problems each of us faces in understanding what is happening in the economy.

The concepts and variables you have discovered in this chapter are used over and over again in the various applications discussed in this book. We use the concepts of real gross domestic product (real GDP), the inflation rate, the unemployment rate, and so forth almost everywhere in our study of macroeconomics.

Key Links


  1. Which of the following variables are stocks? Which are flows?

    1. The number of cars parked on the street where you live.
    2. The number of cars that drive past your house every day.
    3. The number of people losing their jobs and becoming unemployed.
    4. The blue jeans on the shelves of a GAP store.
    5. The amount of water in a reservoir.
    6. The amount of money you have on your person right now.
    7. The amount of money you spent this week.
  2. Suppose an economy produces at least as much—and maybe more—of every good and service this year compared to last year. Also suppose that the price of every single good and service is at least as high this year as it was last year. What, if anything, can you conclude about nominal GDP, real GDP, and the price level between the two years?
  3. Why do we exclude intermediate goods when calculating GDP?
  4. Redo Table 3.3 "Real GDP Using 2012 as the Base Year" assuming that 2013 is the base year.
  5. Suppose that Australia had nominal GDP last year equal to 1 trillion Australian dollars and that in the first quarter of this year, its nominal GDP is 252 billion Australian dollars. What is Australia’s annualized growth rate of nominal GDP?
  6. Suppose that, between 2012 and 2013, a country experiences 3 percent negative inflation (this is known as deflation). In other words, prices are on average 3 percent lower in 2013 compared to 2012. However, the economy also experiences real economic growth of 5 percent. Is nominal GDP in 2013 greater or less than in 2012?
  7. If nominal GDP in country A grows faster than nominal GDP in country B, what, if anything, can you conclude about the inflation rates in the two countries?
  8. Suppose that the price of Brazilian coffee decreases. What does that imply for the Consumer Price Index (CPI) in Germany? What does that imply for the GDP deflator in Japan?
  9. Is it possible for prices to be increasing and the inflation rate to be decreasing at the same time? Explain why or why not.
  10. Is it possible for an economy’s production to increase at the same time that total income in the economy decreases? Explain why or why not.
  11. Which of the following people are classified as unemployed?

    1. A full-time student who also works part time in a store selling CDs.
    2. A worker who would like a job but has given up looking because she was unable to find one.
    3. An autoworker who was recently laid off and is looking for a new job.
    4. A member of the military who is not currently on active duty.
    5. A woman on maternity leave from her job.
    6. A 70-year-old man who is actively applying for jobs.
  12. Give three reasons why real GDP is an imperfect measure of economic welfare.

Economics Detective

  1. Update Table 3.2 "Nominal GDP in the United States, 2000–2010" and Figure 3.3 "Nominal GDP in the United States, 2000–2010" using data from the Bureau of Economic Analysis (BEA). Using the IMF World Economic Outlook Database (, create tables to show nominal GDP, the GDP price deflator, and real GDP for Argentina.
  2. A version of GDP that takes into account environmental effects is called “environmental accounting” or “green accounting.” Use the Internet to find a discussion of this alternative way of calculating GDP. List some of the differences between the usual way of calculating GDP and the environmental or green accounting method. Do other countries employ these alternative measures?
  3. Try to find out whether people in richer countries are happier than those in poorer countries.

Spreadsheet Exercise

  1. Table 3.9 Data

    Year T-shirts Music Downloads Meals
    Price ($) Quantity Price ($) Quantity Price ($) Quantity
    2012 25 12 1 60 25 5
    2013 30 10 1.80 50 23 2

    Using the data in the preceding table, reconstruct Table 3.1 "Calculating Nominal GDP" to calculate nominal GDP, Table 3.3 "Real GDP Using 2012 as the Base Year" to calculate real GDP, and Table 3.4 "Calculating the Price Index" to calculate a price index and the inflation rate.