GDP Calculation Methods 4 — Questions and Answers
Question 1: The GDP deflator differs from CPI primarily because the GDP deflator:
- Measures only import price changes
- Uses a fixed consumer basket each year
- Covers all goods and services in GDP, not just consumer goods (Correct answer)
- Excludes government spending from its calculation
Correct answer: Covers all goods and services in GDP, not just consumer goods
The GDP deflator reflects price changes for all domestically produced goods and services, while CPI only tracks a fixed basket of consumer goods.
Question 2: A country produces only cars worth $30,000 each. In year 1, it makes 100 cars at $30,000; in year 2, it makes 110 cars at $33,000. What is real GDP growth from year 1 to year 2?
- 10% (Correct answer)
- 21%
- 3%
- 10% price + 10% quantity = 21% nominal, but real = 10%
Correct answer: 10%
Real GDP growth measures only the quantity change: 110 vs. 100 cars = 10% growth, holding prices constant.
Question 3: In the income approach to GDP, 'mixed income' typically refers to:
- Combined wages and investment returns of corporations
- Income of self-employed individuals that blends labor and capital returns (Correct answer)
- Average household income across income quintiles
- Tax revenue mixed with transfer payments
Correct answer: Income of self-employed individuals that blends labor and capital returns
Mixed income is earned by the self-employed and unincorporated enterprises, where it is difficult to separate returns to labor from returns to capital.
Question 4: Statistical discrepancy in GDP accounts arises because:
- The government underestimates military spending
- The expenditure, income, and output approaches use different data sources and may not align perfectly (Correct answer)
- Import data is always overstated
- Consumer surveys systematically undercount spending
Correct answer: The expenditure, income, and output approaches use different data sources and may not align perfectly
The three GDP approaches should theoretically yield identical results, but data collection imperfections cause small differences requiring a statistical discrepancy adjustment.
Question 5: Which best describes 'chain-weighting' used in U.S. real GDP calculations?
- Averaging prices from the first and last year of a period to reduce bias
- Fixing a single base year's prices for all future calculations
- Weighting each good's price change by its GDP share in consecutive years (Correct answer)
- Adjusting GDP for population growth each year
Correct answer: Weighting each good's price change by its GDP share in consecutive years
Chain-weighting updates the price weights used to compute real GDP each year, reducing the substitution bias present in fixed-base-year methods.
Question 6: Gross private domestic investment in the expenditure approach includes all of the following EXCEPT:
- New factory construction
- Business purchases of machinery
- Residential home construction
- Consumer spending on appliances (Correct answer)
Correct answer: Consumer spending on appliances
Consumer purchases of appliances are classified under consumption (C), not investment (I), even though appliances last many years.
Question 7: If a foreign-owned car plant in Ohio produces $500 million in vehicles, this output is:
- Included in U.S. GDP but not U.S. GNP (Correct answer)
- Excluded from both U.S. GDP and GNP
- Included in both U.S. GDP and GNP
- Counted only in the home country's GNP
Correct answer: Included in U.S. GDP but not U.S. GNP
GDP counts all production within U.S. borders regardless of ownership, while GNP excludes foreign-owned production and adds U.S.-owned foreign production.
GDP Calculation Methods 4
The GDP deflator differs from CPI primarily because the GDP deflator: