Components of GDP Flashcards

A homeowner decides to paint their own house rather than hire a contractor. What happens to GDP?

Answer: GDP is unaffected because no market transaction occurred

GDP only counts market transactions; do-it-yourself work that is never sold in the market is excluded from GDP calculations.

Which component of GDP would capture a family buying a newly constructed home?

Answer: Gross Private Domestic Investment (I)

New residential construction is classified as residential investment, a sub-category of Gross Private Domestic Investment.

If businesses accumulate more unsold inventory than planned, how does this affect GDP?

Answer: It increases Investment (I) through unplanned inventory investment

Unsold inventory is counted as unplanned inventory investment within the Investment component, ensuring production is captured even before a sale occurs.

A foreign tourist spends $3,000 at U.S. hotels and restaurants. Which GDP component captures this spending?

Answer: Net Exports (NX) as an export

Foreign spending on domestic goods and services is treated as an export, boosting the Net Exports component of U.S. GDP.

Which of the following is counted in the Consumption (C) component of GDP?

Answer: Monthly rent paid to a landlord

Rent payments are a service purchase by households and fall under Consumption, specifically the services subcategory.

The U.S. Department of Defense purchases new fighter jets. Which GDP component is affected?

Answer: Government Expenditure (G)

Federal government purchases of goods — including military equipment — are counted in Government Expenditure (G).

Which statement correctly describes the relationship between GDP components and trade deficits?

Answer: A trade deficit means NX is negative, which reduces GDP

When imports exceed exports, Net Exports (NX) is negative, which arithmetically reduces the GDP total in the expenditure approach.