GDP Calculation Methods 2 — Questions and Answers
Question 1: In the expenditure approach to GDP, which component represents government spending on goods and services?
- Transfer payments (G)
- Government consumption and investment (G) (Correct answer)
- Net taxes minus subsidies
- Public sector wages only
Correct answer: Government consumption and investment (G)
In the expenditure approach, G includes all government purchases of goods and services but excludes transfer payments like Social Security.
Question 2: Which of the following is subtracted in the expenditure approach to GDP?
- Gross private investment
- Consumer spending
- Imports (Correct answer)
- Government expenditures
Correct answer: Imports
Imports are subtracted in GDP = C + I + G + (X - M) because they represent spending on foreign-produced goods.
Question 3: Under the income approach, what does 'net operating surplus' primarily represent?
- Employee wages before taxes
- Corporate profits and self-employment income (Correct answer)
- Government tax revenue
- Depreciation of capital
Correct answer: Corporate profits and self-employment income
Net operating surplus captures profits earned by corporations and income earned by self-employed individuals.
Question 4: The value-added method avoids double-counting by summing only:
- Total sales revenue at each production stage
- The difference between output value and input costs at each stage (Correct answer)
- Final retail prices across all industries
- Raw material costs across the supply chain
Correct answer: The difference between output value and input costs at each stage
Value added at each stage equals the value of output minus the value of intermediate inputs purchased from other firms.
Question 5: A U.S. bakery buys $500 of flour and sells $1,200 of bread. What is its contribution to GDP using the value-added method?
- $1,200
- $500
- $700 (Correct answer)
- $1,700
Correct answer: $700
Value added = $1,200 (output) − $500 (intermediate input) = $700, which is the bakery's unique contribution to GDP.
Question 6: In the income approach, 'compensation of employees' includes:
- Only take-home wages after income taxes
- Wages, salaries, and employer-paid benefits like health insurance (Correct answer)
- Only full-time salaries, not part-time wages
- Cash wages and tips only
Correct answer: Wages, salaries, and employer-paid benefits like health insurance
Compensation of employees encompasses all wages, salaries, bonuses, and non-wage benefits such as employer contributions to health insurance and pensions.
Question 7: Which GDP calculation approach starts with industry output and traces value creation through production stages?
- Expenditure approach
- Income approach
- Production (output) approach (Correct answer)
- Demand-side approach
Correct answer: Production (output) approach
The production or output approach measures GDP by summing value added across all industries and production stages in the economy.
GDP Calculation Methods 2
In the expenditure approach to GDP, which component represents government spending on goods and services?