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

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

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

   • First year: phones cost most then, so their doubling counts more (52 percent, not 38)
   • 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
5. 4.

   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?

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

6. 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.

7. 5.

   Milo writes one claim comparing each contraction on the chart with the expansion that followed. Which claim is best supported?

   • Contractions have been getting shorter since 1973, so the next one will be shorter still
   • Expansions lasted 120 months on average, the length of the one that followed July 1990
   • Each expansion (58, 120, 73 months) far outlasted the contraction before it (16, 8, 8)
   • The 1973 contraction, at 16 months, was followed by the longest expansion on the chart
8. 6.

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

   • Contractions averaged about 10.7 months and expansions about 251, the total of the three
   • Contractions averaged 32 months, the total of the three, and expansions about 84
   • Contractions averaged about 10.7 months; the three expansions averaged about 84
   • Contractions averaged about 84 months and expansions about 10.7, since contractions feel longer
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 testable: GDP is revised, so no claim about months in contraction can be checked
   • Not supported: 32 months of contraction out of about 336 is just about 10 percent
   • Not testable here: the chart lists only three of the eight contractions, so it undercounts
   • Supported: contractions lasted 32 months against 251 of expansion on the chart, roughly a quarter
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?

    • Not the NBER's test: two of its listed contractions lasted 8 months, under a year
    • Wrong: the NBER counts any fall in real GDP in a single quarter as a recession
    • Right: the longest contraction lasted 16 months, so a year is the usual minimum
    • Right: the NBER requires twelve months and counted the 8-month cases because output fell so far
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
    • 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
    • No measure is final: BEA revises GDP, so the committee checks other data too
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?

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