GDP GDP and International Trade 2 — Questions and Answers
Question 1: Which of the following best explains why a trade deficit does NOT automatically mean GDP is declining?
- High imports can reflect strong domestic consumer demand that boosts C more than M reduces NX (Correct answer)
- Imports are not measured in GDP
- Trade deficits always raise investment spending
- Government spending offsets import losses dollar for dollar
Correct answer: High imports can reflect strong domestic consumer demand that boosts C more than M reduces NX
Strong consumer spending can drive imports higher while simultaneously boosting GDP through robust consumption — the overall effect on GDP depends on all components.
Question 2: If the U.S. imposes a tariff on imported goods, the most likely direct effect on GDP in the short run is:
- Net exports may improve as imports fall (Correct answer)
- GDP falls because tariffs reduce total trade volume
- Consumption automatically rises to offset lower imports
- Government spending decreases
Correct answer: Net exports may improve as imports fall
Tariffs raise the cost of imports and typically reduce import volumes, which can improve net exports (X – M) in the short run.
Question 3: Which of the following U.S. sectors contributes most to export revenue and therefore has the largest positive impact on GDP through trade?
- Capital goods and industrial machinery (Correct answer)
- Raw agricultural commodities only
- Consumer electronics
- Luxury automobiles
Correct answer: Capital goods and industrial machinery
Capital goods and industrial machinery represent the largest category of U.S. exports, making them a major driver of export-led GDP growth.
Question 4: How do remittances sent by U.S. immigrants to their home countries affect U.S. GDP?
- They do not directly appear in GDP because GDP measures production, not transfers of money (Correct answer)
- They reduce GDP as a form of import
- They increase GDP as government transfer payments
- They are counted as U.S. exports
Correct answer: They do not directly appear in GDP because GDP measures production, not transfers of money
Remittances are private transfers of money and are not counted in GDP, which records the value of goods and services produced.
Question 5: Which of the following is TRUE about the relationship between exchange rates and GDP?
- A depreciation of the U.S. dollar makes U.S. exports cheaper, potentially increasing net exports and GDP (Correct answer)
- A stronger dollar always raises GDP by reducing import costs
- Exchange rates have no effect on GDP
- A weaker dollar always causes a trade surplus
Correct answer: A depreciation of the U.S. dollar makes U.S. exports cheaper, potentially increasing net exports and GDP
Dollar depreciation lowers the price of U.S. goods for foreign buyers, which can boost exports and improve net exports, adding to GDP.
Question 6: In the National Income and Product Accounts (NIPA), where are services sold to foreign tourists visiting the U.S. recorded?
- As U.S. exports, increasing net exports and GDP (Correct answer)
- As consumer spending (C) with no export offset
- As government revenue
- They are excluded from GDP
Correct answer: As U.S. exports, increasing net exports and GDP
Foreign tourists purchasing U.S. services represent an export of services, so they are counted as exports (X) and increase net exports.
GDP GDP and International Trade 2
Which of the following best explains why a trade deficit does NOT automatically mean GDP is declining?