GDP Components of GDP 3 — Questions and Answers
Question 1: A homeowner decides to paint their own house rather than hire a contractor. What happens to GDP?
- GDP increases because work was performed
- GDP decreases because no income was earned
- GDP is unaffected because no market transaction occurred (Correct answer)
- GDP increases through the Investment component
Correct answer: GDP is unaffected because no market transaction occurred
GDP only counts market transactions; do-it-yourself work that is never sold in the market is excluded from GDP calculations.
Question 2: Which component of GDP would capture a family buying a newly constructed home?
- Consumption (C)
- Government Expenditure (G)
- Gross Private Domestic Investment (I) (Correct answer)
- Net Exports (NX)
Correct answer: Gross Private Domestic Investment (I)
New residential construction is classified as residential investment, a sub-category of Gross Private Domestic Investment.
Question 3: If businesses accumulate more unsold inventory than planned, how does this affect GDP?
- It reduces GDP because goods were not sold to consumers
- It increases Investment (I) through unplanned inventory investment (Correct answer)
- It has no effect on GDP until the goods are sold
- It is subtracted from Government Expenditure (G)
Correct answer: It increases Investment (I) through unplanned inventory investment
Unsold inventory is counted as unplanned inventory investment within the Investment component, ensuring production is captured even before a sale occurs.
Question 4: A foreign tourist spends $3,000 at U.S. hotels and restaurants. Which GDP component captures this spending?
- Consumption (C)
- Net Exports (NX) as an export (Correct answer)
- Government Expenditure (G)
- Investment (I)
Correct answer: Net Exports (NX) as an export
Foreign spending on domestic goods and services is treated as an export, boosting the Net Exports component of U.S. GDP.
Question 5: Which of the following is counted in the Consumption (C) component of GDP?
- Purchase of a corporate bond
- New home construction by a private builder
- Monthly rent paid to a landlord (Correct answer)
- A city buying new fire trucks
Correct answer: Monthly rent paid to a landlord
Rent payments are a service purchase by households and fall under Consumption, specifically the services subcategory.
Question 6: The U.S. Department of Defense purchases new fighter jets. Which GDP component is affected?
- Investment (I)
- Net Exports (NX)
- Government Expenditure (G) (Correct answer)
- Consumption (C)
Correct answer: Government Expenditure (G)
Federal government purchases of goods — including military equipment — are counted in Government Expenditure (G).
Question 7: Which statement correctly describes the relationship between GDP components and trade deficits?
- A trade deficit increases GDP because more goods are available
- A trade deficit means NX is negative, which reduces GDP (Correct answer)
- Trade deficits only affect the Investment (I) component
- A trade deficit has no effect on the GDP formula
Correct answer: A trade deficit means NX is negative, which reduces GDP
When imports exceed exports, Net Exports (NX) is negative, which arithmetically reduces the GDP total in the expenditure approach.
GDP Components of GDP 3
A homeowner decides to paint their own house rather than hire a contractor.
What happens to GDP?