GDP National Income Accounting 2 — Questions and Answers
Question 1: Which of the following is NOT included in the expenditure approach to calculating GDP?
- Government spending on public schools
- Business purchases of new machinery
- A family buying a used car (Correct answer)
- Consumer spending on new appliances
Correct answer: A family buying a used car
Used goods are excluded from GDP because they were counted when first produced; only new production is included.
Question 2: In national income accounting, 'Net National Product' (NNP) is calculated as:
- GDP minus depreciation
- GNP minus depreciation (Correct answer)
- GDP plus net foreign income
- GNP plus transfer payments
Correct answer: GNP minus depreciation
NNP equals GNP minus the capital consumption allowance (depreciation), representing the net output after accounting for worn-out capital.
Question 3: Disposable personal income is best defined as:
- Personal income minus personal taxes (Correct answer)
- National income minus corporate retained earnings
- GDP minus depreciation and indirect taxes
- Personal income plus transfer payments
Correct answer: Personal income minus personal taxes
Disposable personal income is personal income after subtracting personal taxes, representing what households can spend or save.
Question 4: When the BEA measures GDP using the income approach, which component compensates workers for their labor?
- Proprietors' income
- Compensation of employees (Correct answer)
- Corporate profits
- Net interest
Correct answer: Compensation of employees
Compensation of employees — wages, salaries, and fringe benefits — is the largest income component in the income approach to GDP.
Question 5: A US citizen working in Canada generates income that counts toward:
- US GDP only
- Canadian GDP only
- US GNP and Canadian GDP (Correct answer)
- US GDP and Canadian GNP
Correct answer: US GNP and Canadian GDP
GDP is location-based (Canada), while GNP/GNI is ownership-based (US), so the income enters Canadian GDP and US GNP.
Question 6: Which item would be classified as a 'transfer payment' and therefore excluded from GDP?
- A nurse's salary paid by Medicare
- Social Security retirement benefits (Correct answer)
- Federal highway construction spending
- Defense contractor payments
Correct answer: Social Security retirement benefits
Social Security benefits are transfer payments — money redistributed without a corresponding production of goods or services — so they are excluded from GDP.
Question 7: If GDP equals $20 trillion and GNP equals $20.4 trillion, what can we infer about the US economy?
- Foreign nationals earn more in the US than Americans earn abroad
- Americans earn more abroad than foreigners earn in the US (Correct answer)
- The US has a trade surplus
- Depreciation exceeds net investment
Correct answer: Americans earn more abroad than foreigners earn in the US
When GNP exceeds GDP, net factor income from abroad is positive, meaning Americans' overseas earnings exceed foreign residents' earnings inside the US.
GDP National Income Accounting 2
Which of the following is NOT included in the expenditure approach to calculating GDP?