GDP Calculation Methods 5 — Questions and Answers
Question 1: When calculating GDP using the expenditure approach, why are transfer payments like Social Security excluded from government spending (G)?
- They are too difficult to measure accurately
- They represent redistribution, not purchase of new goods or services (Correct answer)
- They are classified as private investment
- They are already included in net exports
Correct answer: They represent redistribution, not purchase of new goods or services
Transfer payments redistribute income without corresponding production of goods or services, so including them would overstate GDP.
Question 2: Which scenario would cause a country's GDP to rise without any change in actual production?
- A fall in the unemployment rate
- An increase in the price level (inflation) (Correct answer)
- A rise in the labor force participation rate
- An increase in productivity
Correct answer: An increase in the price level (inflation)
Nominal GDP includes price effects, so inflation raises nominal GDP even if real output is unchanged.
Question 3: In GDP accounting, how is owner-occupied housing handled?
- It is excluded since no rent is actually paid
- An imputed rental value is estimated and counted as output (Correct answer)
- It is classified under government investment
- It is subtracted from consumption to avoid double-counting
Correct answer: An imputed rental value is estimated and counted as output
The BEA imputes a rental value for owner-occupied homes so that homeowners and renters contribute equivalently to GDP.
Question 4: Which of the following economic activities is EXCLUDED from official U.S. GDP calculations?
- Services provided by non-profit hospitals
- Wages paid to domestic workers
- Illegal drug sales (Correct answer)
- Residential construction by homebuilders
Correct answer: Illegal drug sales
Illegal activities are excluded from official U.S. GDP because they are unreported and unrecorded, though some countries do attempt to estimate them.
Question 5: The 'leakages and injections' framework of GDP states that in equilibrium:
- Savings + Taxes + Imports = Investment + Government Spending + Exports (Correct answer)
- Savings = Investment only
- Taxes must equal government spending exactly
- Imports must equal exports exactly
Correct answer: Savings + Taxes + Imports = Investment + Government Spending + Exports
In the full circular flow, leakages (S + T + M) must equal injections (I + G + X) for the economy to be in equilibrium.
Question 6: Per capita GDP is calculated by dividing GDP by:
- The number of employed workers
- The total population (Correct answer)
- The labor force size
- The number of households
Correct answer: The total population
GDP per capita = GDP ÷ Total Population, providing a rough measure of average living standards.
Question 7: Which method is most commonly used by national statistical agencies to estimate GDP for service sectors where output is hard to measure?
- Counting physical units of output
- Using input measures such as hours worked or number of employees (Correct answer)
- Summing all service transactions on stock exchanges
- Applying import price indices to domestic services
Correct answer: Using input measures such as hours worked or number of employees
For hard-to-measure services like government and education, statisticians often proxy output using input measures such as labor hours or employment counts.
GDP Calculation Methods 5
When calculating GDP using the expenditure approach, why are transfer payments like Social Security excluded from government spending (G)?