GDP - Gross Domestic Product GDP Calculation Methods Questions and Answers

Question 1

An economist is calculating a country's Gross Domestic Product (GDP) using the expenditure approach. Which of the following transactions would be included in the calculation?

Accepted Answer

A homeowner purchasing a newly built house.

Answer

The expenditure approach to GDP is calculated as C + I + G + (X-M). The purchase of a newly built house is considered part of Investment (I) and is therefore included in the GDP calculation. The purchase of tires by a car manufacturer is an intermediate good, social security is a transfer payment, and buying stocks is a financial transaction; none of these are included in GDP.

Question 2

The income approach to calculating GDP sums up all the income earned by factors of production. Which of the following is NOT a component of the income approach?

Accepted Answer

Government purchases of goods and services.

Answer

The income approach sums factor incomes like wages, rents, interest, and profits. Government purchases of goods and services is a component of the expenditure approach (G in the C+I+G+(X-M) formula), not the income approach.

Question 3

A steel company sells steel to a bicycle manufacturer for $200. The bicycle manufacturer uses the steel to produce a bicycle, which it sells to a retailer for $500. The retailer then sells the bicycle to a customer for $700. Using the value-added approach, what is the total contribution to GDP from these transactions?

Accepted Answer

$700

Answer

The value-added approach sums the value added at each stage of production to avoid double-counting. The steel company adds $200. The bicycle manufacturer adds $300 ($500 - $200). The retailer adds $200 ($700 - $500). The total value added is $200 + $300 + $200 = $700, which is equal to the final market price of the bicycle.

Question 4

Which of the following is explicitly excluded from the calculation of a country's Gross Domestic Product (GDP)?

Accepted Answer

The sale of illegal goods and services on the black market.

Answer

GDP measures the market value of all final goods and services produced within a country. Transactions that occur in the black market (illegal goods and services) are not recorded and are therefore excluded from official GDP calculations.

Question 5

To avoid double-counting in the calculation of GDP, economists primarily include the value of:

Accepted Answer

final goods and services only.

Answer

GDP only includes the market value of final goods and services. The value of intermediate goods (goods used in the production of other goods) is already incorporated into the price of the final good. Including them separately would result in counting their value multiple times.

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product GDP Calculation Methods Questions and Answers