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Detailed Explanation of GDP Components quiz

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  • What are the four main components of GDP in the expenditure approach?
    The four main components are consumption, investment, government purchases, and net exports.
  • How is consumption categorized in GDP calculations?
    Consumption is divided into services, non-durable goods, and durable goods.
  • What distinguishes a service from a good in GDP's consumption component?
    A service is an intangible act provided to consumers, while a good is a tangible product.
  • What is the difference between non-durable and durable goods?
    Non-durable goods have less than 3 years of expected life, while durable goods last more than 3 years.
  • Give an example of a non-durable good and a durable good.
    Food is a non-durable good; a car is a durable good.
  • What types of spending are included in the investment component of GDP?
    Investment includes spending on new capital goods, residential construction, and changes in inventory.
  • Why are stocks and bonds not included in GDP's investment component?
    Stocks and bonds are financial investments, not physical investments, so they are excluded from GDP.
  • What counts as residential investment in GDP?
    Residential investment includes spending on new home construction and improvements to existing homes.
  • How are changes in inventory treated in GDP calculation?
    An increase in inventory is counted as investment, reflecting goods produced but not yet sold.
  • Who makes government purchases in the GDP formula?
    Government purchases are made by local, state, and federal governments.
  • Why are transfer payments excluded from government purchases in GDP?
    Transfer payments do not result in production; they are only included when spent on goods and services.
  • How are net exports calculated in the GDP formula?
    Net exports are calculated as exports minus imports.
  • What happens to net exports if imports are greater than exports?
    Net exports become negative, indicating a trade deficit.
  • What is the difference between exports and imports in GDP?
    Exports are goods produced domestically and sold abroad; imports are goods produced abroad and sold domestically.
  • What is the formula for GDP using the expenditure approach?
    GDP = Consumption + Investment + Government Purchases + Net Exports (GDP = C + I + G + NX).