GDP Concept and Indicators 5 — Questions and Answers
Question 1: Which of the following best describes the 'underground economy' in relation to GDP?
- Mining and extraction industries
- Legal and illegal transactions that go unreported to avoid taxes or regulation (Correct answer)
- Subsistence farming measured by imputed value
- Transactions conducted electronically
Correct answer: Legal and illegal transactions that go unreported to avoid taxes or regulation
The shadow or underground economy consists of unreported activities that escape official measurement, causing GDP to understate true economic activity.
Question 2: Which statement about GDP and environmental sustainability is most accurate?
- GDP automatically deducts the cost of pollution
- GDP rises when oil spills occur because cleanup spending counts as output (Correct answer)
- GDP falls when carbon emissions increase
- GDP only counts environmentally certified production
Correct answer: GDP rises when oil spills occur because cleanup spending counts as output
Disaster cleanup, pollution remediation, and even depletion of natural resources can boost GDP by generating market activity, a well-known criticism of the measure.
Question 3: Which GDP concept strips out the depreciation of capital to show net output available for consumption and new investment?
- Real GDP
- Net Domestic Product (NDP) (Correct answer)
- Nominal GDP
- GDP per capita
Correct answer: Net Domestic Product (NDP)
NDP = GDP − Capital Consumption Allowance (depreciation), representing the net value of goods and services produced after replacing worn-out capital.
Question 4: In a simple circular-flow model, which of the following is true?
- Household spending equals business investment
- Total income in the economy equals total output (Correct answer)
- Government spending always equals tax revenue
- Exports always equal imports
Correct answer: Total income in the economy equals total output
By definition, total spending on output equals total income generated from producing it, which is the foundation of GDP identity.
Question 5: If real GDP grows faster than population, which of the following occurs?
- Real GDP per capita falls
- Real GDP per capita rises (Correct answer)
- Nominal GDP per capita falls
- The GDP deflator increases
Correct answer: Real GDP per capita rises
When real output grows faster than population, the average person's share of real output—real GDP per capita—increases, indicating rising living standards.
Question 6: Which of the following is an example of a 'transfer payment' that is excluded from GDP?
- Federal highway construction spending
- State university professor salaries
- Unemployment insurance benefits paid to workers (Correct answer)
- Military equipment purchases
Correct answer: Unemployment insurance benefits paid to workers
Transfer payments redistribute income without producing new goods or services; they are excluded from G in the GDP formula.
Question 7: Which of the following statements about GDP growth and recessions is correct per the NBER's definition?
- A recession requires exactly two consecutive quarters of negative GDP growth
- The NBER dates recessions based on a broad range of indicators, not just two quarters of negative GDP (Correct answer)
- Recessions begin the quarter GDP first turns negative
- A recession ends only after four quarters of positive GDP growth
Correct answer: The NBER dates recessions based on a broad range of indicators, not just two quarters of negative GDP
The National Bureau of Economic Research (NBER) uses multiple monthly indicators—employment, income, sales—and does not rely solely on the two-quarter GDP rule.
GDP Concept and Indicators 5
Which of the following best describes the 'underground economy' in relation to GDP?