GDP Calculation 2 — Questions and Answers
Question 1: Using the expenditure approach, which formula correctly represents GDP?
- GDP = C + I + G + (X - M) (Correct answer)
- GDP = C + I + G + (M - X)
- GDP = C + G + NX - I
- GDP = C + I - G + NX
Correct answer: GDP = C + I + G + (X - M)
GDP equals Consumption plus Investment plus Government spending plus Net Exports (Exports minus Imports).
Question 2: A country has consumption of $800B, investment of $200B, government spending of $300B, exports of $150B, and imports of $180B. What is GDP?
- $1,470B (Correct answer)
- $1,500B
- $1,450B
- $1,630B
Correct answer: $1,470B
$800B + $200B + $300B + ($150B - $180B) = $1,470B.
Question 3: In the income approach, which of the following is NOT typically included in GDP calculation?
- Transfer payments (Correct answer)
- Wages and salaries
- Corporate profits
- Rental income
Correct answer: Transfer payments
Transfer payments like Social Security are not included because they do not represent production of goods or services.
Question 4: The value-added method calculates GDP by summing:
- The value added at each stage of production (Correct answer)
- Only final retail prices of all goods
- Total revenue of all firms
- Total wages paid across all industries
Correct answer: The value added at each stage of production
To avoid double-counting, GDP sums only the value added at each production stage, not total sales.
Question 5: If a baker buys $2 of flour and sells $5 of bread, what is the value added by the baker?
- $3 (Correct answer)
- $5
- $2
- $7
Correct answer: $3
Value added equals the selling price minus the cost of intermediate goods: $5 - $2 = $3.
Question 6: Which component of GDP includes business spending on new machinery and residential construction?
- Gross Private Domestic Investment (Correct answer)
- Government Expenditure
- Net Exports
- Personal Consumption
Correct answer: Gross Private Domestic Investment
Gross Private Domestic Investment covers business equipment, structures, and residential construction.
Question 7: When calculating GDP using the expenditure approach, which transaction is included?
- A household buys a newly built home (Correct answer)
- A person sells a 10-year-old car
- The government pays unemployment benefits
- An investor buys existing corporate stock
Correct answer: A household buys a newly built home
New residential construction counts as gross investment in GDP; resales of existing assets and transfer payments do not.
GDP Calculation 2
Using the expenditure approach, which formula correctly represents GDP?