GDP, real vs nominal, and the business cycle

Grade 12 Social Studies Worksheet

Circle the best answer.

1. Read this first

   A two-good economy in two years (made up)

   Good	Price, year 1	Quantity, year 1	Price, year 2	Quantity, year 2
   Phones	$100	10	$60	20
   Bread	$2.00	500	$2.20	520

   Note: The economy and its prices are made up. Card A: Nominal GDP values output at each year's own prices. Real GDP values output at the prices of one base year, so it changes only when quantities change. Card B (in our words): BEA's chained dollars average the growth found with the first year's prices and with the second year's prices, so no single base year decides the result. Card C: A price index compares what a fixed basket of goods costs in two years.

2. 1.

   Nominal GDP is 2,000 in year 1 and 2,344 in year 2. Pia computes real growth at first-year prices. Which statement is best supported?

   • Real GDP grew 52 percent because bread output rose from 500 to 520, the main source of growth
   • Real GDP grew less than nominal GDP, since real GDP subtracts the effect of rising prices
   • Both grew about 17 percent, since real GDP is nominal GDP with the same numbers relabeled and nothing else changed
   • Nominal rose about 17 percent but real, at first-year prices, rose 52 as phone output doubled
3. 2.

   At second-year prices, real growth is about 38 percent, not 52. Bo asks why the base year changes the answer. Which reason fits card A?

   • One figure counts quantities and the other counts prices, which is why they differ
   • Phones, the fast-growing good, get a higher price weight in the first year than in the second
   • The gap comes from bread, whose price rose 10 percent and counts more at second-year prices
   • Just one of the two can be right, since real GDP has a single true growth rate
4. 3.

   Real growth is about 52 percent at first-year prices and 38 at second-year prices. Esme finds the chained figure that card B describes. Which is closest?

   • About 52 percent, since the first base year is the one BEA uses for the comparison
   • About 45 percent, between the two, since chained dollars average the two base years
   • About 17 percent, since a chained measure follows nominal growth as its guide and ignores base years
   • About 38 percent, since a chained measure follows the later year's prices and drops the earlier ones
5. 4.

   Kira asks which base year makes real growth look larger and why. Which answer fits the chart and card A?

   • Second year: the latest prices are the most accurate, which gives the larger growth
   • Neither: real growth does not depend on prices, just on how many units were made
   • First year: bread output rose in the same year, so first-year prices give the larger growth
   • First year: phones cost most then, so their doubling counts more (52 percent, not 38)
6. 5.

   A reporter says real growth of about 45 percent means people could buy 45 percent more. Luz tests the claim. What is the best reply?

   • Shown for phones, but not for bread, since bread grew by just 4 percent
   • Shown: output is what people consume, so 45 percent more output is 45 percent more to buy
   • Not shown: real growth of 45 percent already counts the price changes, so it cannot be used
   • Not shown: real GDP measures total output, and the table has no incomes or who buys it

7. Three U.S. contractions and the expansions after them

   Peak	Trough	Contraction (months)	Expansion that followed (months)
   November 1973	March 1975	16	58
   July 1990	March 1991	8	120
   March 2001	November 2001	8	73

   Note: NBER, U.S. Business Cycle Expansions and Contractions, retrieved Nov 14, 2026. The chart lists three of the eight contractions between December 1969 and April 2020. A contraction runs from a peak to the next trough; an expansion runs from a trough to the next peak. Card B (in our words): The NBER's Business Cycle Dating Committee looks at real GDP, real income, employment, industrial production and sales. It does not use a fixed rule such as two quarters of falling GDP. BEA revises its GDP estimates as more data arrive.

8. 6.

   Noah averages the lengths on the chart. Which statement is correct?

   • Contractions averaged 32 months, the total of the three, and expansions about 84
   • Contractions averaged about 84 months and expansions about 10.7, since contractions feel longer
   • Contractions averaged about 10.7 months and expansions about 251, the total of the three
   • Contractions averaged about 10.7 months; the three expansions averaged about 84
9. 7.

   A writer says the economy is in recession about a quarter of the time. Ren tests it with the chart. What is the best verdict?

   • Not supported: 32 months of contraction out of about 336 is just about 10 percent
   • Not testable: GDP is revised, so no claim about months in contraction can be checked
   • Supported: contractions lasted 32 months against 251 of expansion on the chart, roughly a quarter
   • Not testable here: the chart lists only three of the eight contractions, so it undercounts
10. 8.

    A student says a recession needs at least a year of falling output. Tala tests the claim with the chart. What is the best reply?

    • Right: the NBER requires twelve months and counted the 8-month cases because output fell so far
    • Not the NBER's test: two of its listed contractions lasted 8 months, under a year
    • Right: the longest contraction lasted 16 months, so a year is the usual minimum
    • Wrong: the NBER counts any fall in real GDP in a single quarter as a recession
11. 9.

    A student says GDP alone should date the business cycle. Zee asks why the NBER also uses income, jobs, production and sales. Which reason fits card B?

    • GDP alone is enough, since it adds up the output of the economy and so covers the others
    • No measure is final: BEA revises GDP, so the committee checks other data too
    • The committee distrusts GDP, so it ignores GDP and uses the other four measures
    • Jobs data replace GDP, because employment and output are the same thing in the end
12. 10.

    A writer says long expansions cause recessions, since the 120-month expansion ended in a contraction. Ari tests the claim with the chart. What is the best verdict?

    • Refuted: the 73-month expansion was shorter and also ended in a recession
    • Shown in reverse: long expansions follow short contractions, so recessions cause long expansions
    • Shown: the longest expansion ended in a recession, so length must cause recessions
    • Not shown: the chart gives lengths and dates, not causes, so one long expansion shows nothing