The four categories of expenditure used by the expenditure approach method to calculate GDP are A) consumption expenditure, taxes, saving and investment. B) consumption expenditure, investment, net imports and saving. C) saving, taxes, government expenditure and investment. D) consumption expenditure, investment, government expenditure and net exports. 14. In the equation, GDPC+1+G+NX, G refers to A) federal government expenditures plus all transfer payments. B) local, state, and federal government spending for all purposes. C) the taxes and expenditures of all government units. D) local, state, and federal government expenditure on goods and services, but does not include transfer payments. 15. Let C represent consumption expenditure, S saving. / gross private domestic investment, G government expenditure on goods and services, and NX net exports of goods and services. Then GDP equals A) C+S+G+NX. B) C+S+G-NX. C)C+I+G+NX. D) C+I+G-NX. 16. Which of the following purchases is included in personal consumption expenditures when determining gross domestic product? A) purchase of a new house because of the arrival of a new baby B) purchase of a new office building C) vacation expenses for a spring trip to Fort Lauderdale D) purchases of jeans to add to a store’s inventory 17. Goods that are produced this year, stored in inventories, and then sold to consumers next vear A) count in this year’s GDP. B) count in next year’s GDP. C) count in both this year’s and next year’s GDP. D) are not counted as a part of GDP. 18. An example of “investment” in computing real GDP using the expenditure approach is the purchase of A) a new set of tools by an auto mechanic, for use in repairing cars. B) 100 shares of IBM stock. C) a 100 year old house by a married couple. D) computer chips by Dell to put in their personal computers.
The Correct Answer and Explanation is :
Here are the correct answers along with detailed explanations:
13. The four categories of expenditure used by the expenditure approach method to calculate GDP are:
Answer: D) consumption expenditure, investment, government expenditure, and net exports.
Explanation: The expenditure approach to calculating GDP sums up all the spending in the economy on final goods and services. These are broken down into four categories:
- Consumption expenditure (C): This includes all private spending by households on goods and services.
- Investment (I): This refers to business spending on capital goods and residential construction, as well as changes in inventories.
- Government expenditure (G): This includes all government spending on goods and services (excluding transfer payments like Social Security).
- Net exports (NX): This is the difference between exports (goods sold to foreign buyers) and imports (goods bought from abroad). Net exports can be positive or negative.
14. In the equation, GDPC + I + G + NX, G refers to:
Answer: D) local, state, and federal government expenditure on goods and services, but does not include transfer payments.
Explanation: In the GDP formula, “G” stands for government expenditure. This refers to the total spending by the government on goods and services such as infrastructure, education, defense, and public services. Transfer payments, like pensions or unemployment benefits, are not included because they do not reflect the purchase of new goods or services.
15. Let C represent consumption expenditure, S saving, I gross private domestic investment, G government expenditure on goods and services, and NX net exports of goods and services. Then GDP equals:
Answer: C) C + I + G + NX.
Explanation: The GDP formula in the expenditure approach is given by:
- C (consumption expenditure),
- I (investment),
- G (government expenditure),
- NX (net exports, which is exports minus imports).
Thus, the equation for GDP is:
GDP = C + I + G + NX.
16. Which of the following purchases is included in personal consumption expenditures when determining gross domestic product?
Answer: C) vacation expenses for a spring trip to Fort Lauderdale.
Explanation: Personal consumption expenditures (C) include spending on goods and services by households. A vacation is a service expenditure and therefore is part of consumption. A new house purchase (A) would be part of investment (not consumption), and purchasing an office building (B) is also an investment. Purchases for inventory (D) are not counted as consumption but are considered part of investment.
17. Goods that are produced this year, stored in inventories, and then sold to consumers next year:
Answer: A) count in this year’s GDP.
Explanation: When goods are produced in the current year but sold in the next year, they are included in this year’s GDP because production is counted when the goods are made, not when they are sold. The sale in the next year will count as consumption in the year it is sold.
18. An example of “investment” in computing real GDP using the expenditure approach is the purchase of:
Answer: A) a new set of tools by an auto mechanic, for use in repairing cars.
Explanation: “Investment” in the context of GDP includes business spending on capital goods that will be used for future production. A new set of tools for an auto mechanic is a capital good used in the production process and thus counts as an investment. The purchase of shares (B) or a house (C) are financial transactions, not direct investments in physical capital. The purchase of chips (D) by Dell is part of business spending, but it’s classified differently in the expenditure approach as part of intermediate goods, not investment in final goods.