GDP - Gross Domestic Product Components of GDP Questions and Answers

Question 1

Which of the following transactions would be included in the calculation of a country's Gross Domestic Product (GDP)?

Accepted Answer

A homeowner purchasing a new lawnmower from a local retailer.

Answer

GDP measures the market value of all final goods and services produced within a country in a specific period. The purchase of a new lawnmower represents the purchase of a final, newly produced good and is therefore included in the consumption component of GDP. Financial transactions like buying stock, government transfer payments, and the sale of used or antique goods do not reflect current production and are excluded.

Question 2

A domestic company manufactures and sells a new line of advanced robotics to a firm in another country. How would this transaction be recorded in the GDP expenditure formula (GDP = C + I + G + NX)?

Accepted Answer

It would increase Net Exports (NX).

Answer

The transaction represents an export, which is a good produced domestically and sold to a foreign entity. Exports are added to the Net Exports (NX) component of GDP. Net Exports are calculated as Exports minus Imports (X - M). Therefore, this sale increases exports and, consequently, increases Net Exports.

Question 3

The government of Country B recently spent $50 billion on constructing new highways and bridges. This expenditure would be classified under which component of GDP?

Accepted Answer

Government Purchases (G)

Answer

Government Purchases (G) include spending by federal, state, and local governments on final goods and services. The construction of public infrastructure like highways and bridges is a direct purchase of goods and services by the government and is therefore included in this component.

Question 4

Which of the following is considered part of the 'Investment' (I) component in the GDP calculation?

Accepted Answer

A family purchasing a newly built house.

Answer

In the context of GDP, 'Investment' (I) includes spending on capital goods, changes in inventories, and household purchases of new housing. The purchase of a newly constructed home is classified as residential investment. Financial assets like bonds, employee salaries (which are part of the income approach), and household purchases of durable goods like cars (part of Consumption) are not included in the Investment component.

Question 5

A U.S. consumer buys a new smartphone that was manufactured in South Korea. How does this purchase affect the U.S. GDP components?

Accepted Answer

Consumption (C) increases, and Net Exports (NX) decreases.

Answer

The purchase of the smartphone increases the Consumption (C) component because it is a purchase by a household. However, because the good was produced abroad, it is also an import. Imports are subtracted from exports to calculate Net Exports (NX). Therefore, the increase in imports causes the Net Exports (NX) component to decrease. The two effects cancel each other out in the overall GDP calculation, but they are recorded in their respective components.

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Components of GDP Questions and Answers