GDP Concept and Indicators 4 — Questions and Answers
Question 1: Which approach to measuring GDP sums wages, profits, rents, and interest across the economy?
- Expenditure approach
- Income approach (Correct answer)
- Production approach
- Value-added approach
Correct answer: Income approach
The income approach (also called the income-distribution approach) sums all factor payments: wages, rent, interest, and profit.
Question 2: Inventory investment in GDP accounting refers to:
- Purchases of new software by businesses
- Changes in the stock of unsold goods held by firms (Correct answer)
- Government stockpiling of strategic reserves
- Consumer purchases on credit
Correct answer: Changes in the stock of unsold goods held by firms
When firms produce more than they sell, inventories rise and are counted as investment; a drawdown of inventories reduces I.
Question 3: Which sector's spending is represented by the variable 'G' in the GDP formula C + I + G + NX?
- Only federal government spending
- All levels of government (federal, state, local) on goods and services (Correct answer)
- Government transfer payments only
- All government revenues collected
Correct answer: All levels of government (federal, state, local) on goods and services
G includes federal, state, and local government purchases of goods and services but excludes transfer payments like Social Security.
Question 4: Purchasing Power Parity (PPP) adjustments to GDP are used primarily to:
- Convert nominal GDP to real GDP
- Compare living standards across countries by accounting for price level differences (Correct answer)
- Measure a country's trade balance
- Estimate potential GDP
Correct answer: Compare living standards across countries by accounting for price level differences
PPP-adjusted GDP converts each country's output using prices that reflect what goods actually cost locally, enabling fairer cross-country comparisons.
Question 5: Which of the following would be classified as 'investment' (I) in the GDP expenditure approach?
- A household buying a stock mutual fund
- A business purchasing a new factory (Correct answer)
- A consumer buying a flat-screen TV
- The government buying fighter jets
Correct answer: A business purchasing a new factory
Business fixed investment—structures, equipment, and intellectual property—is the I component; financial assets and consumer durables are classified differently.
Question 6: The Bureau of Economic Analysis (BEA) publishes the U.S. National Income and Product Accounts (NIPAs) primarily to:
- Set monetary policy interest rates
- Provide comprehensive measures of U.S. economic output, income, and spending (Correct answer)
- Determine federal tax rates
- Manage the national debt
Correct answer: Provide comprehensive measures of U.S. economic output, income, and spending
The NIPAs, produced by the BEA, are the official statistical framework tracking GDP, GNP, national income, and related aggregates.
Question 7: An economy produces only two goods: 100 apples at $1 each and 50 oranges at $2 each. What is GDP?
- $100
- $150
- $200 (Correct answer)
- $250
Correct answer: $200
GDP = (100 × $1) + (50 × $2) = $100 + $100 = $200.
GDP Concept and Indicators 4
Which approach to measuring GDP sums wages, profits, rents, and interest across the economy?