GDP Items Excluded from GDP 5 — Questions and Answers
Question 1: Which of the following financial activities is excluded from GDP?
- A bank lending $1 million to a small business (Correct answer)
- A factory producing $1 million of auto parts
- A restaurant generating $1 million in food sales
- A hospital providing $1 million in medical services
Correct answer: A bank lending $1 million to a small business
Bank lending creates a financial asset and liability but does not itself produce goods or services; it is a financial transaction excluded from GDP.
Question 2: A hobbyist grows vegetables in her backyard garden and consumes them. This activity is excluded from GDP because:
- It is non-market production with no observable price (Correct answer)
- Agricultural output is measured separately by the USDA
- She does not pay income tax on the vegetables
- Vegetable gardens are classified as inventory
Correct answer: It is non-market production with no observable price
Home-grown food consumed by the producer is non-market output with no transaction price, leaving it outside the scope of standard GDP measurement.
Question 3: Capital gains earned when an investor sells appreciated stock are excluded from GDP because they:
- Reflect price changes on existing assets, not new production (Correct answer)
- Are taxed separately under capital gains rules
- Represent foreign investment income
- Are counted under net exports instead
Correct answer: Reflect price changes on existing assets, not new production
Capital gains represent increases in the market value of existing assets; they do not reflect the creation of new goods or services.
Question 4: Foreign remittances sent by US immigrants to family abroad are excluded from US GDP because:
- They are transfer payments that do not purchase US-produced goods or services (Correct answer)
- They count toward foreign GDP instead
- Remittances are classified as foreign aid
- The BEA cannot track cross-border payments
Correct answer: They are transfer payments that do not purchase US-produced goods or services
Remittances are private transfers of income; they do not represent payment for newly produced domestic output and are therefore excluded from US GDP.
Question 5: A city auctions a government-owned parking lot to a private developer for $5 million. How does this sale affect GDP?
- It does not affect GDP because it is a transfer of an existing asset (Correct answer)
- GDP rises by $5 million under government expenditure
- GDP falls by $5 million due to reduced public assets
- Only the developer's subsequent construction counts
Correct answer: It does not affect GDP because it is a transfer of an existing asset
Selling an existing public asset is an asset transfer, not production; only the new construction the developer undertakes afterward would be added to GDP.
Question 6: Illegal activities such as drug trafficking are excluded from official US GDP primarily because:
- They are not reported and thus not captured in official statistics (Correct answer)
- They involve no exchange of money
- They are already counted under imports
- The BEA law prohibits including criminal activity
Correct answer: They are not reported and thus not captured in official statistics
Illegal transactions are unreported and invisible to statistical agencies, making measurement impossible and leaving them outside official GDP estimates.
Question 7: A retiree earns $3,000 in interest from a savings account. Is this interest income included in GDP?
- No, because interest on existing financial assets is not counted as new production (Correct answer)
- Yes, it is counted under personal consumption expenditures
- Yes, it is included under gross private investment
- No, because retirees are not part of the labor force
Correct answer: No, because interest on existing financial assets is not counted as new production
Interest payments on financial assets are transfers of income between borrowers and lenders and do not represent new production of goods or services.
GDP Items Excluded from GDP 5
Which of the following financial activities is excluded from GDP?