Multiple Choice
Which of the following correctly states the expenditure approach for computing GDP?
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10. Measuring National Output and Income
Expenditure Approach for Measuring GDP
Multiple Choice
In the expenditure approach to measuring GDP, which of the following is included in GDP?
A
A government transfer payment (e.g., Social Security benefits)
B
A household’s purchase of a newly built home
C
A household’s purchase of a used car from another household
D
The purchase of shares of stock in an existing corporation
Verified step by step guidance1
Step 1: Understand the expenditure approach to GDP, which calculates GDP as the sum of consumption (C), investment (I), government spending (G), and net exports (NX). The formula is:
\[ GDP = C + I + G + NX \]
Step 2: Identify what types of transactions count towards each component. For example, consumption includes household spending on goods and services, investment includes business spending on capital and residential construction, government spending includes government purchases of goods and services, and net exports are exports minus imports.
Step 3: Analyze each option in the problem:
- Government transfer payments (like Social Security) are not included because they are transfers, not payments for goods or services.
- A household’s purchase of a newly built home counts as investment because it is new residential construction.
- A household’s purchase of a used car from another household is not included because it is a secondhand sale and does not represent new production.
- The purchase of shares of stock is a financial transaction and does not represent production of goods or services, so it is excluded.
Step 4: Conclude that only the purchase of a newly built home is included in GDP under the expenditure approach because it represents new production and investment.
Step 5: Remember that GDP measures the market value of all final goods and services produced within a country during a specific period, so only transactions involving new production are counted.
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