GDP Components of GDP 5 — Questions and Answers
Question 1: Under the income approach to GDP, which of the following is a primary factor income category?
- Consumer spending on services
- Corporate profits, wages, and rental income (Correct answer)
- Taxes minus subsidies only
- Net Exports minus tariff revenue
Correct answer: Corporate profits, wages, and rental income
The income approach sums factor incomes — wages/salaries, corporate profits, rental income, net interest, and proprietors' income — to arrive at GDP.
Question 2: Which of the following changes would REDUCE the Consumption (C) component of GDP?
- A rise in household disposable income
- An increase in consumer confidence
- A sharp rise in the personal savings rate (Correct answer)
- A decrease in the unemployment rate
Correct answer: A sharp rise in the personal savings rate
When households save more of their income, they spend less on goods and services, directly reducing the Consumption component of GDP.
Question 3: A municipal government builds a new public library funded by bonds. Which GDP component records this spending?
- Investment (I) because it is financed by borrowing
- Consumption (C) because residents will use it
- Government Expenditure (G) as a public structure investment (Correct answer)
- Net Exports (NX) if construction materials were imported
Correct answer: Government Expenditure (G) as a public structure investment
Public structures built by government entities are classified as government investment within the Government Expenditure (G) component regardless of the funding source.
Question 4: Which scenario illustrates 'planned inventory investment' in the Investment (I) component?
- A store sells out of a product faster than expected
- A manufacturer deliberately stockpiles raw materials ahead of a price increase (Correct answer)
- A firm fires workers to reduce production costs
- A retailer marks down prices to clear slow-moving stock
Correct answer: A manufacturer deliberately stockpiles raw materials ahead of a price increase
Deliberately building up inventory (stockpiling) is planned inventory investment, a sub-component of Gross Private Domestic Investment.
Question 5: The U.S. runs a current account deficit. All else equal, what does this imply about the Net Exports (NX) term in GDP?
- NX is positive, adding to GDP
- NX is zero because deficits are balanced by capital flows
- NX is negative, subtracting from GDP (Correct answer)
- NX is irrelevant when the current account deficit is financed externally
Correct answer: NX is negative, subtracting from GDP
A current account deficit primarily reflects imports exceeding exports, making NX negative and arithmetically reducing GDP.
Question 6: Which of the following would be classified as a 'nondurable good' in the Consumption (C) component of GDP?
- A laptop computer
- A new automobile
- A bag of groceries (Correct answer)
- A residential refrigerator
Correct answer: A bag of groceries
Nondurable goods are items expected to last fewer than three years; groceries are a classic example and are part of consumption spending.
Question 7: If nominal GDP rises from $20 trillion to $22 trillion but the GDP deflator also rises from 100 to 110, what happened to real GDP?
- Real GDP rose from $20T to $22T
- Real GDP remained at $20 trillion (Correct answer)
- Real GDP fell below $20 trillion
- Real GDP rose to $24.2 trillion
Correct answer: Real GDP remained at $20 trillion
Real GDP = Nominal GDP / (Deflator/100) = $22T / 1.10 = $20T, so all the nominal increase was due to inflation, not real output growth.
GDP Components of GDP 5
Under the income approach to GDP, which of the following is a primary factor income category?