GDP Concept and Indicators 2 — Questions and Answers
Question 1: Which of the following is NOT counted in U.S. GDP?
- A U.S. company's factory output in Ohio
- A foreign company's output at its U.S. plant
- A U.S. company's factory output in Mexico (Correct answer)
- Government spending on public schools
Correct answer: A U.S. company's factory output in Mexico
GDP measures output produced within a country's borders, so a U.S. company's output in Mexico is excluded.
Question 2: The GDP deflator is best described as:
- The ratio of nominal GDP to real GDP multiplied by 100 (Correct answer)
- The percentage change in the CPI
- The rate of change in producer prices
- The ratio of real GDP to potential GDP
Correct answer: The ratio of nominal GDP to real GDP multiplied by 100
The GDP deflator equals (Nominal GDP / Real GDP) × 100, capturing the overall price level of all goods in the economy.
Question 3: In the expenditure approach to GDP, net exports equal:
- Exports minus imports (Correct answer)
- Imports minus exports
- Exports plus imports
- Exports divided by imports
Correct answer: Exports minus imports
Net exports (NX) = Exports − Imports; a trade deficit means NX is negative, reducing GDP.
Question 4: Which scenario would INCREASE measured GDP?
- A homeowner mows their own lawn
- A family cooks dinner at home
- A restaurant hires a new chef and increases sales (Correct answer)
- A neighbor informally babysits for cash, unreported
Correct answer: A restaurant hires a new chef and increases sales
Market transactions for final goods and services are counted; unreported cash transactions and household production are not.
Question 5: Potential GDP refers to:
- The highest GDP ever recorded in history
- The level of output when all resources are fully and efficiently employed (Correct answer)
- GDP adjusted for purchasing power parity
- The GDP target set by the Federal Reserve
Correct answer: The level of output when all resources are fully and efficiently employed
Potential GDP is the economy's maximum sustainable output when labor and capital are fully utilized without generating excess inflation.
Question 6: Which indicator is used to compare living standards across countries with different population sizes?
- Nominal GDP
- Real GDP
- GDP per capita (Correct answer)
- GDP growth rate
Correct answer: GDP per capita
GDP per capita divides total GDP by population, allowing meaningful comparisons of average output and living standards.
Question 7: The 'output gap' is defined as:
- The difference between exports and imports
- The gap between nominal and real GDP
- The difference between actual GDP and potential GDP (Correct answer)
- The difference between GDP and GNP
Correct answer: The difference between actual GDP and potential GDP
A positive output gap means the economy is overheating; a negative gap indicates underutilized resources and slack.
GDP Concept and Indicators 2
Which of the following is NOT counted in U.S.
GDP?