GDP Calculation Methods 5

Question 1

When calculating GDP using the expenditure approach, why are transfer payments like Social Security excluded from government spending (G)?

Accepted Answer

They represent redistribution, not purchase of new goods or services

Answer

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?

Accepted Answer

An increase in the price level (inflation)

Answer

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?

Accepted Answer

An imputed rental value is estimated and counted as output

Answer

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?

Accepted Answer

Illegal drug sales

Answer

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:

Accepted Answer

Savings + Taxes + Imports = Investment + Government Spending + Exports

Answer

In the full circular flow, leakages (S + T + M) must equal injections (I + G + X) for the economy to be in equilibrium.

GDP - Gross Domestic Product Practice Test