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Teaching Unit II: Measuring Economic Performance. The second unit of instruction entails the
content area of Measurement of Economic Performance as detailed in the AP* Economics Course
Description1 (Content Area II, A-C)
I. Plan
Teaching Materials
Instructors Manual Coursebook Text readings
Taking the Nation’s Economic
Pulse,
Chapter 7,
Coursebook, Chapter 7 Taking the Nation’s Economic
Pulse,
Chapter 7
Economic Fluctuations,
Unemployment, and Inflation,
Chapter 8,
Coursebook, Chapter 8 Economic Fluctuations,
Unemployment, and Inflation,
Chapter 8
Key instructional objectives: Students do the following
1. define gross domestic product (GDP), what it does and does not measure.
2. explain double counting and how it can be avoided.
4. explain GDP as a measure of national standard of living.
5. analyze and explain the accounting identify between expenditures and income
6. calculate and explain personal income, disposable income, and personal savings.
7. explain how GDP measures the nation’s standard of living.
8. explain distinction between GDP and gross national product (GNP)
10. calculate and explain a price index.
11. explain base year and how it is used to construct price index
12. differentiate among different kinds of price indexes.
14. define and differentiate between recessions and depressions
15. define unemployment and differentiate among cyclical, frictional and structural
unemployment.
16. analyze the concept of full employment: definition, empirical data, and economists’ point of
view.
18. differentiate between potential GDP and actual GDP.
19. define and explain the different kinds of unemployment that may exist in the economy.
Computational and graphing skills:
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Compute GDP and NNP given novel data
Compute and interpret price indexes (CPI and GDP deflators)
Formative Signals: The following content and skill areas have been identified as areas of
weakness for students based upon past objective and free response examinations.
Objective Formative Signals: Based upon
the released objective AP* Micro Economics
examinations, less than 50% of the students
have been able to correctly answer questions to
following
Free response Formative Signals: Past
students have found these to be problematic
areas
predicting results of an increase in the
understand link between expenditures
II. Teach
Recommended sequence of instruction: Teach market concepts in this sequence
Chapter 7
Taking the Nation’s Economic Pulse
1. GDP A MEASURE OF OUTPUT, P. 131
2. GDP AS A MEASURE OF BOTH OUTPUT AND INCOME, P. 134
Define gross domestic product (GDP); explain why the value of a country’s production is the same
as the value of a country’s income
3. ADJUSTING FOR PRICE CHANGES AND DERIVING REAL GDP, P. 139
Distinguish between nominal GDP and real GDP
Price indexes, the consumer price index (CPI) and the gross domestic deflator
Part 4/Unit II 439
4. PROBLEMS WITH GDP AS A MEASURING ROD, P. 143
5. DIFFERENCES IN GDP OVER TIME, P. 145
6. THE GREAT CONTRIBUTION OF GDP, P. 148
Chapter 8
Economic Fluctuations, Unemployment, and Inflation
1. SWINGS IN THE ECONOMIC PENDALUM, P. 153
2. ECONOMIC FLUCTUATIONS AND THE LABOR MARKET, P. 155
Define unemployment rate and its relationship with the business cycle and GDP.
Analyze core employment concepts
Civilian labor force
3. THREE TYPES OF UNEMPLOYMENT, P. 160
4. EMPLOYMENT FLUCTUATIONS THE HISTORICAL RECORD, P. 163
5. ACTUAL AND POTENTIAL GDP, P. 165
Differentiate among employment concepts and relationships to the business cycle.
Full employment
6. THE EFFECTS OF INFLATION, P. 165
Define and explain effects of inflation
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Inflation, definition
Measuring, calculating, interpreting inflation
Anticipated versus unanticipated
Who is harmed by inflation? Explain
1. What are the measures of national economic performance?
2. How can we measure the level of real performance?
3. Why are only final goods and services evaluated in deriving GDP?
4. Explain how GDPP measures welfare of the nation?
5. How can GDP understate a nation’s productivity?
6. What is the difference between nominal GDP and real GDP?
7. What is a GDP deflator? How is the GDP deflator used to understand the distinctions between
nominal and real GDP?
8. Who is helped and who is harmed by inflation?
9. What is meant by unemployment?
10. What is the CPI?
11. How is the CPI constructed?
III. Assess: Suggestions for determining what and how much students have learned.
Past Objective AP* Test: Based upon released objective examinations, the students have been
required to demonstrate the following content related to this unit of instruction.
Task and behaviors related to gross domestic product (GDP)
identify transactions leading to change in GDP
recognize limitations of measure economic welfare using GDP concepts
understand the composition of GDP
Task and behaviors related to nominal and real values; the construction of price indexes.
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understand distinctions between real and nominal values
compute rate of inflation given nominal and real GDP values
Task and behaviors related to employment
differentiate among structural, frictional and cyclical unemployment
understand how unemployment rate is calculated
Past Free Response AP* Questions: Based upon released free response questions, the students
have been required to demonstrate the following content related to this unit of instruction.
1997, identify two ways of calculating GDP, using income vs. expenditure approach.
1999, identify method of calculating GDP; identify shortcomings of GDP; evaluate growth
of GDP; show effects of investment on production possibility frontier.
2006, explain the changes in unemployment, given changes in an expansionary fiscal
policy; distinguish between actual and natural employment rates; evaluate the impact on
unemployment rates given changes in number of people employed.
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Sample Multiple-Choice Questions for Macro Unit II
1. Gross Domestic Product is
(A) the market value of all goods and services exchanged within a country during a time
period.
(B) the market value of all domestic assets, regardless of whether they are owned by citizens
or foreigners.
(C) the compensation received during a period for labor services plus interest, rents, and
corporate profits.
(D) the market value of final goods and services produced within a country during a time
period.
(E) the market value of all goods and services produced by the citizens of a country during a
time period.
2. Which of the following is true?
(A) GDP is a flow concept.
(B) GDP is a stock concept.
(C) The purchase prices of both intermediate goods and final goods are included in GDP.
(D) GDP measures economic welfare.
(E) GDP is a measure of changes in the general level of prices.
3. Which of the following would increase the GDP of the United States?
(A) A Californian buys a case of wine from a winery in France.
(B) A Frenchman buys a case of wine from a winery in California.
(C) A Californian spends $3000 on a vacation in the French Alps.
(D) A French investor purchases 100 shares of a computer company located in Silicon
Valley.
(E) A California investor purchases 100 shares of a wine-making company located in Paris.
4. Which of the following events will reduce GDP?
(A) A hurricane destroys your house.
(B) You lose $500 playing poker.
(C) You pay $500 to repair the damage done to your house by a hurricane.
(D) You work 15 hours less this month so that you can repair the damage done to your home
by a hurricane.
(E) You build a new house after your old house is destroyed by a hurricane.
5. GDP during a period can be calculated by summing either
(A) the purchases of domestically produced final goods and services or the cost incurred in
the production of those goods.
(B) the amount received by business firms for consumer goods and services or the spending
of business firms on investment goods and services.
(C) all household expenditures on final goods and services or all business purchases of
factors of production.
(D) sales of goods and services to foreigners or the purchase of goods and services from
foreigners.
(E) the final market value of all goods purchased or the income generated from all labor
services rendered.
6. Which one of the following would count as investment in the national income accounts?
(A) buying a U.S. government bond
(B) buying 100 shares of Wal-Mart stock
(C) buying an existing house
(D) a freight-hauling firm buying a new domestically produced truck
(E) a car manufacturer buying tires from a tire manufacturer
7. If an economy s capital stock is greater at the end of the year than at the beginning of the year,
over this period
(A) net investment has been positive.
(B) depreciation has exceeded net investment.
(C) depreciation has exceeded gross investment.
(D) net investment has exceeded gross investment.
(E) net investment has been negative.
8. Which of the following best illustrates the difference between GDP and GNP?
(A) GDP measures the goods consumed by the citizens of a country, while GNP measures
output exported to other countries.
(B) GDP measures the output produced by the citizens within a country, while GNP
measures output produced by noncitizens within a country.
(C) GDP measures the output produced by the citizens of a country, while GNP measures
output produced within the borders of a country.
(D) GDP measures the output produced within the borders of a country, while GNP
measures output produced by the citizens of a country.
(E) GDP measures the gross output produced within the borders of a country, while GNP
measures the net output produced by the citizens of a country.
9. The consumer price index is
(A) a measure of the increase in the average price of all of the goods that are included in the
calculation of GDp.
(B) a comparison of the cost of buying a typical bundle of goods during a given period with
the cost of buying the same bundle during an earlier base period.
(C) the ratio of the average price of a typical market basket of goods compared to the cost of
producing those goods during the previous year.
(D) a comparison of the cost of the typical bundle of goods consumed in period 1 with the
cost of a different bundle of goods typically consumed in period 2.
(E) the ratio of GDP to GNP consumed in a given period.
10. Your brother graduated from college 10 years ago and started to work at a salary of $20,000.
You expect to graduate this year and start to work for $40,000. If the consumer price index
was 100 ten years ago and is 200 this year, what can we accurately conclude about salaries?
(A) Your real starting salary is higher.
(B) Your brother had a higher real starting salary.
(C) You and your brother both will have started at the same real salary level.
(D) You and your brother both will have started at the same nominal salary level.
(E) Your brother had a higher nominal starting salary.
11. If you wanted to compare the quantity of output of a country across time periods, which of the
following would you use?
(A) the consumer price index
(B) nominal GDP
(C) the GDP deflator
(D) real GDP
(E) GDP minus GNP
12.GDP will tend to overstate the real output level of a country when
(A) economic bads like pollution are produced and then must be cleaned up.
(B) economic goods like education are produced and shared by everyone.
(C) there is a sizable underground economy.
(D) non-market production represents a large portion of the economy.
(E) working conditions improve, allowing jobs to be completed safer and faster.
13. Crime currently affects the measurement of GDP such that
(A) expenditures on police protection and detention centers contribute to GDp.
(B) the loss to victims due to crime is subtracted from GDp.
(C) expenditures on both police protection and criminal detention are completely ignored in
the calculation of GDP because they do not affect the well-being of people.
(D) expenditures on police protection and detention centers are subtracted from GDp.
(E) expenditures on police protection are subtracted from GDP because it is an intermediate
good.
14. Which of the following is true?
(A) A depression is a recession that is mild and relatively brief.
(B) The expansions and contractions of real world business cycles last varying lengths of
time.
(C) The expansions and contractions of real world business cycles are of a constant length,
usually about 24 months.
(D) The timing of business fluctuations is regular and, therefore, easily predictable.
(E) During the recessionary phase of the business cycle, the rate of unemployment is
generally quite low.
15. Which one of the following persons would be considered unemployed?
(A) a person not working who has given up searching for a job
(B) a part-time worker looking for a full-time job
(C) a full-time worker looking for a part-time job
(D) a construction worker who was laid off due to cold weather
(E) a full-time college student who is not a member of the labor force
16. Which of the following would be classified as employed?
(A) a full-time college student
(B) a construction worker on layoff due to cold weather
(C) a parent who works 50 to 60 hours per week caring for family members
(D) a worker who is in the midst of a two-week vacation from his regular job
(E) a bartender working in the underground economy
17. Which one of the following would be classified as employed?
(A) a parent of a handicapped child who works 50 to 60 hours per week caring for the child
(B) a construction worker vacationing in Florida who is on layoff due to bad weather
conditions in her home state
(C) a 21-year-old full-time college student
(D) a 17-year-old high school student who works a newspaper route six hours per week
(E) a volunteer working 20 hours per week at a homeless shelter
18. When individuals are unemployed because they lack the qualifications to fill available jobs,
this is called
(A) frictional unemployment.
(B) natural unemployment.
(C) cyclical unemployment.
(D) seasonal unemployment.
(E) structural unemployment.
19. Full employment is the rate of employment that results when
(A) all the labor resources of the economy are employed full time.
(B) cyclical unemployment has reached its maximum.
(C) everybody who wants a job can find one.
(D) only frictional and structural unemployment are present.
(E) only cyclical unemployment is present.
20. Which of the following is the best example of a choice that will provide a person with
inflationary expectations with some protection against increases in the future rate of inflation?
(A) a consumer who decides to delay the purchase of a new home or automobile
(B) a consumer who borrows money at a fixed interest rate in order to purchase a new home
(C) an investor who borrows funds at an adjustable money interest rate (one that
automatically increases with higher inflation)
(D) a homebuyer who borrows funds at a variable interest rate
(E) a consumer who pays off a fixed rate loan early
Answers to Multiple-Choice Sample Questions for Macro Unit II
Sample Free–Response Question for Macro Unit II
1. There are two ways to calculate GDP, what are those two ways?
(A) Why would GDP add up to the same number using either method of calculation?
(B) Explain two ways in which GDP does not accurately measure the standard of living .
(C) Explain the difference between real and nominal GDp.
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Answers to Free-Response Sample Question for Macro Unit II
This question would be graded using a 7 point rubric.
1. One point for correctly stating the income cost approach
One point for correctly stating the expenditure approach