GDP Components of GDP 2 — Questions and Answers
Question 1: Which component of GDP includes spending by state and local governments but excludes transfer payments like Social Security?
- Net Exports
- Government Expenditure (G) (Correct answer)
- Investment (I)
- Consumption (C)
Correct answer: Government Expenditure (G)
Government Expenditure (G) covers purchases of goods and services by all levels of government but excludes transfer payments since those are not purchases of new output.
Question 2: A U.S. company builds a new factory in Mexico. How does this affect U.S. GDP components?
- It increases U.S. Investment (I)
- It decreases U.S. Net Exports (NX)
- It does not directly affect U.S. GDP (Correct answer)
- It increases U.S. Government Expenditure (G)
Correct answer: It does not directly affect U.S. GDP
GDP measures output produced within a country's borders, so a factory built in Mexico does not count in U.S. GDP regardless of the company's nationality.
Question 3: In the expenditure approach to GDP, which formula correctly represents all four components?
- GDP = C + I + G + NX (Correct answer)
- GDP = C + S + T + NX
- GDP = C + I + G - NX
- GDP = Y + I + G + NX
Correct answer: GDP = C + I + G + NX
The standard expenditure formula is GDP = C + I + G + NX, where NX can be positive or negative depending on trade balance.
Question 4: Which of the following best represents 'Gross Private Domestic Investment' in GDP calculations?
- Consumer purchases of durable goods only
- Business fixed investment, residential investment, and changes in inventories (Correct answer)
- Stock market purchases and bond issuances
- Federal government infrastructure spending
Correct answer: Business fixed investment, residential investment, and changes in inventories
Gross Private Domestic Investment includes business fixed investment (equipment/structures), residential investment, and inventory changes.
Question 5: If U.S. exports are $500 billion and imports are $600 billion, what is the Net Exports (NX) component?
- $1,100 billion
- $500 billion
- -$100 billion (Correct answer)
- $600 billion
Correct answer: -$100 billion
Net Exports = Exports − Imports = $500B − $600B = −$100 billion, indicating a trade deficit that reduces GDP.
Question 6: Which scenario would INCREASE the Investment (I) component of GDP?
- A consumer buys a used car from a private seller
- A corporation purchases new machinery for its factory (Correct answer)
- The government issues bonds to finance a deficit
- A household buys shares of stock in a company
Correct answer: A corporation purchases new machinery for its factory
Purchasing new machinery is business fixed investment, which directly increases the Investment component of GDP.
Question 7: Why are transfer payments like unemployment benefits excluded from the Government (G) component of GDP?
- They are too small to measure accurately
- They represent money redistribution, not new production of goods or services (Correct answer)
- They are counted under Consumption (C) instead
- They are included in Net Exports (NX)
Correct answer: They represent money redistribution, not new production of goods or services
Transfer payments redistribute income without corresponding production of new goods or services, so they are not counted as government spending in GDP.
GDP Components of GDP 2
Which component of GDP includes spending by state and local governments but excludes transfer payments like Social Security?