GDP GDP and International Trade 1 — Questions and Answers
Question 1: In the expenditure approach to GDP, net exports (NX) are calculated as:
- Exports minus imports (Correct answer)
- Imports minus exports
- Exports plus imports
- Exports divided by imports
Correct answer: Exports minus imports
Net exports equal the value of a country's total exports minus its total imports.
Question 2: If the United States imports more than it exports, what happens to GDP?
- GDP is reduced because net exports are negative (Correct answer)
- GDP is unaffected by trade flows
- GDP increases because imports add to domestic spending
- GDP increases because more money flows into the economy
Correct answer: GDP is reduced because net exports are negative
Negative net exports (a trade deficit) reduce GDP in the expenditure approach because more spending goes abroad than comes in from foreign buyers.
Question 3: Which component of GDP directly reflects the impact of international trade?
- Net exports (X – M) (Correct answer)
- Government spending (G)
- Investment (I)
- Consumption (C)
Correct answer: Net exports (X – M)
Net exports directly capture international trade by measuring the difference between what a country sells to and buys from the rest of the world.
Question 4: A U.S. consumer buys a Japanese-made television. How does this transaction affect U.S. GDP?
- It is counted in consumption but offset by the import deduction in net exports (Correct answer)
- It directly increases U.S. GDP because it was purchased in the U.S.
- It has no effect on GDP
- It increases U.S. net exports
Correct answer: It is counted in consumption but offset by the import deduction in net exports
The purchase is recorded as consumer spending (C), but since the TV was produced abroad it is subtracted as an import (M), leaving no net addition to U.S. GDP.
Question 5: When a foreign company purchases U.S.-made aircraft, this transaction:
- Increases U.S. exports and raises U.S. GDP (Correct answer)
- Decreases U.S. GDP because money leaves the country
- Has no effect because the payment is made in dollars
- Counts only as U.S. investment
Correct answer: Increases U.S. exports and raises U.S. GDP
Sales to foreign buyers are U.S. exports, which increase net exports (X – M) and therefore raise GDP.
Question 6: A trade deficit means a country's:
- Imports exceed its exports (Correct answer)
- Exports exceed its imports
- GDP is negative
- Government is running a budget deficit
Correct answer: Imports exceed its exports
A trade deficit occurs when the value of a country's imports is greater than the value of its exports.
GDP GDP and International Trade 1
In the expenditure approach to GDP, net exports (NX) are calculated as: