GDP Concept and Indicators 3 — Questions and Answers
Question 1: Which of the following transactions IS included in GDP?
- Purchase of a used car
- Purchase of a U.S. Treasury bond
- A builder constructing a new home for sale (Correct answer)
- A retiree receiving a Social Security check
Correct answer: A builder constructing a new home for sale
New residential construction is investment (I) in the expenditure approach; used goods, financial assets, and transfer payments are excluded.
Question 2: When the BEA releases its 'advance' GDP estimate, it is based on:
- Complete data for the entire quarter
- Roughly two-thirds of the data, with estimates filling the rest (Correct answer)
- Only the first month of the quarter
- A survey of 10,000 businesses
Correct answer: Roughly two-thirds of the data, with estimates filling the rest
The advance estimate uses about two-thirds of available source data and is revised in subsequent 'second' and 'third' releases.
Question 3: Which component of GDP is typically the MOST VOLATILE over the business cycle?
- Consumer spending (C)
- Government spending (G)
- Net exports (NX)
- Business investment (I) (Correct answer)
Correct answer: Business investment (I)
Business investment in equipment, structures, and inventories swings sharply with economic confidence and credit conditions.
Question 4: GNP differs from GDP in that GNP:
- Excludes government spending
- Adds income earned by residents abroad and subtracts income earned domestically by foreigners (Correct answer)
- Adjusts for inflation using the CPI
- Measures only manufacturing output
Correct answer: Adds income earned by residents abroad and subtracts income earned domestically by foreigners
GNP = GDP + income earned by U.S. residents abroad − income earned in the U.S. by foreign residents.
Question 5: A country's nominal GDP rose 8% while its price level rose 5%. Approximately what was real GDP growth?
- 13%
- 8%
- 5%
- 3% (Correct answer)
Correct answer: 3%
Real GDP growth ≈ Nominal GDP growth − Inflation rate = 8% − 5% = 3%.
Question 6: Which of the following is a LIMITATION of GDP as a welfare measure?
- It counts only domestically produced goods
- It does not account for income distribution or environmental degradation (Correct answer)
- It adjusts for inflation automatically
- It includes household production
Correct answer: It does not account for income distribution or environmental degradation
GDP can grow while inequality widens or natural resources are depleted, missing important dimensions of societal well-being.
Question 7: Intermediate goods are excluded from GDP calculations to avoid:
- Understating output
- Double counting (Correct answer)
- Overstating inflation
- Misrepresenting trade balances
Correct answer: Double counting
Counting both the steel and the car it goes into would count the steel's value twice; only the final car's value is included.
GDP Concept and Indicators 3
Which of the following transactions IS included in GDP?