GDP Components of GDP 4 — Questions and Answers
Question 1: Which component of GDP tends to be the most volatile over the business cycle?
- Consumption (C)
- Government Expenditure (G)
- Net Exports (NX)
- Gross Private Domestic Investment (I) (Correct answer)
Correct answer: Gross Private Domestic Investment (I)
Investment is the most volatile GDP component because businesses rapidly cut capital spending during recessions and expand it during booms.
Question 2: In the U.S., approximately what share of GDP does personal consumption expenditure (C) typically represent?
- About 30%
- About 50%
- About 70% (Correct answer)
- About 90%
Correct answer: About 70%
Personal consumption expenditure historically accounts for roughly 68–70% of U.S. GDP, making it the largest single component.
Question 3: A pharmaceutical company spends $200 million on R&D that leads to a new drug. Since 2013, how has the BEA treated this spending in GDP?
- It is excluded from GDP as an intermediate input
- It is counted in Consumption (C) as a service purchase
- It is counted in Investment (I) as intellectual property investment (Correct answer)
- It is counted in Government Expenditure (G) if federally funded
Correct answer: It is counted in Investment (I) as intellectual property investment
Since 2013, the BEA reclassified R&D spending as intellectual property investment, adding it to the Gross Private Domestic Investment component.
Question 4: A U.S. automaker imports $1 billion in car parts from Germany and sells finished cars domestically. How does this affect GDP components?
- Only Investment (I) rises by $1 billion
- Consumption rises but Net Exports fall, with no net change from the imported parts (Correct answer)
- Government Expenditure rises to cover tariffs on imports
- Net Exports rise because the cars are sold domestically
Correct answer: Consumption rises but Net Exports fall, with no net change from the imported parts
When finished cars are sold domestically, Consumption rises; but the imported parts increase Imports, reducing NX by an equivalent amount, netting out the foreign content.
Question 5: Which of the following expenditures is NOT included in GDP?
- A restaurant buying a new commercial oven
- A household paying for a streaming subscription
- An investor buying shares of Apple stock on the NYSE (Correct answer)
- A city government repaving a road
Correct answer: An investor buying shares of Apple stock on the NYSE
Purchasing existing financial assets like stocks is not production of new goods or services and therefore is not counted in GDP.
Question 6: How does depreciation relate to the difference between Gross Domestic Product and Net Domestic Product?
- NDP = GDP + Depreciation
- NDP = GDP − Depreciation (Capital Consumption Allowance) (Correct answer)
- Depreciation is subtracted from Consumption to get NDP
- Depreciation converts nominal GDP to real GDP
Correct answer: NDP = GDP − Depreciation (Capital Consumption Allowance)
Net Domestic Product subtracts depreciation (the capital consumption allowance) from GDP to show output after accounting for worn-out capital.
Question 7: A state government hires 500 new teachers and pays their salaries. Which GDP component does this primarily affect?
- Consumption (C)
- Investment (I)
- Government Expenditure (G) (Correct answer)
- Net Exports (NX)
Correct answer: Government Expenditure (G)
State government employee compensation for public services is included in Government Expenditure (G) in the GDP expenditure approach.
GDP Components of GDP 4
Which component of GDP tends to be the most volatile over the business cycle?