Multiple Choice
In the expenditure approach to measuring GDP, the calculation of GDP excludes the value of which of the following?
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10. Measuring National Output and Income
Expenditure Approach for Measuring GDP
Multiple Choice
Using the expenditure approach to measuring GDP, which of the following is NOT included in GDP for the current year?
A
Government spending to hire additional public school teachers
B
A firm’s purchase of new machinery for its factory
C
A household purchase of shares of stock issued by a corporation
D
A household purchase of a newly built home
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 each option and classify it into one of the expenditure categories:
- Government spending to hire additional public school teachers falls under Government Spending (G).
- A firm’s purchase of new machinery is considered Investment (I).
- A household purchase of shares of stock is a financial transaction and does not represent production of goods or services, so it is not included in GDP.
- A household purchase of a newly built home is considered Investment (I) because it is a new residential investment.
Step 3: Recall that GDP only includes spending on final goods and services produced within the current year. Financial transactions like buying shares of stock are transfers of ownership and do not reflect current production, so they are excluded.
Step 4: Conclude that the household purchase of shares of stock is NOT included in GDP because it is a financial asset transaction, not a purchase of goods or services.
Step 5: Summarize that all other options represent spending on goods or services produced in the current year and are included in GDP under the expenditure approach.
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