GDP Concept and Indicators 4

Question 1

Which approach to measuring GDP sums wages, profits, rents, and interest across the economy?

Accepted Answer

Income approach

Answer

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:

Accepted Answer

Changes in the stock of unsold goods held by firms

Answer

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?

Accepted Answer

All levels of government (federal, state, local) on goods and services

Answer

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:

Accepted Answer

Compare living standards across countries by accounting for price level differences

Answer

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?

Accepted Answer

A business purchasing a new factory

Answer

Business fixed investment—structures, equipment, and intellectual property—is the I component; financial assets and consumer durables are classified differently.

GDP - Gross Domestic Product Practice Test

GDP - Gross Domestic Product Practice Test

GDP Concept and Indicators 4