GDP measures the market value of final goods and services produced inside a country in a year. It leaves out some production, like unpaid housework and the underground economy, and it says nothing about leisure, pollution, or who gets the income. Sort items into "counts" or "does not count," then compare two countries with the same GDP per capita to see what the number hides.
Part A asks one question about each item: does it count in this year's U.S. GDP? Part B holds GDP per capita fixed and lets you change everything GDP misses.
Both countries have real GDP per capita of $50,000. Country A works 35 hours a week, the top 20% of earners get 40% of income, its air pollution index is 30, and each person does $6,000 of unpaid home production a year. Move Country B's sliders.
Cooking at home, cleaning, caring for your own children, and volunteering are real production, but nobody pays a market price for them. GDP leaves them out, so it understates total production. Hire a cleaner for the same work and GDP rises.
Illegal sales and legal work paid in unreported cash never reach government records. GDP misses them, so it understates production most in countries with large underground economies.
GDP counts what people produce, not the time they spend producing it. If a country works longer hours to reach the same GDP, its people have less free time, and GDP per capita does not show that loss.
A phone that costs the same as last year's but does far more adds about the same to GDP. Measured GDP does not fully capture gains in quality or the arrival of new goods, so it can understate improvements in living standards.
GDP per capita is an average. Two countries with the same average can have very different incomes for the typical family if one country's income goes mostly to the top earners.
GDP does not subtract the harm from pollution or the use of natural resources. Spending to clean up pollution adds to GDP, even though it only repairs damage. GDP can rise while the environment gets worse.
Memorize the reason for each row. AP questions often pair a counted item with an uncounted one that looks similar.
| Item | In this year's U.S. GDP? | Reason |
|---|---|---|
| New car or haircut bought by a household | Yes | Consumption (C): a new final good or service |
| New house, new factory equipment, unsold inventory | Yes | Investment (I): new capital goods, residential construction, and changes in inventories |
| Government buys a fighter jet, pays a teacher, or pays for a river cleanup | Yes | Government purchases (G) of goods and services |
| Car built in Michigan and sold in Canada | Yes | Exports, added in net exports (X − M) |
| Foreign-owned plant in the U.S. (a Toyota built in Kentucky) | Yes | Produced inside U.S. borders. GDP is about location, not ownership |
| U.S.-owned factory in Mexico | No | Produced outside the U.S. It is in Mexico's GDP (and U.S. GNP) |
| Used car, used textbook, an old house resold | No | Secondhand sale: counted the year it was made. A dealer's or agent's fee does count |
| Stocks, bonds, a savings deposit | No | Financial transaction: ownership changes, nothing is produced. A broker's fee counts |
| Social Security, unemployment benefits, welfare payments | No | Transfer payment: no good or service is bought, so it is not G |
| Tires, steel, or flour sold to a firm that uses them in a final product | No | Intermediate good: already in the price of the final good |
| Home cooking, unpaid housework, volunteering | No | Nonmarket activity: GDP understates production |
| Illegal sales, unreported cash work | No | Underground economy: GDP understates production |
AP-style multiple choice. Pick an answer to see the explanation.
The vocabulary for topic 2.2. Read the list, flip through flashcards, or quiz yourself. For every term in the unit, see the Unit 2 terminology guide.