Which type of spending is NOT considered a component of Gross Domestic Product (GDP)?

• A. Consumer spending on goods and services
• B. Government purchases of goods and services
• C. Transfer payments such as Social Security
• D. Business investment in equipment and structures

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the components of Gross Domestic Product (GDP). GDP is typically calculated using the expenditure approach, which sums up the following components: Consumer spending (C), Investment by businesses (I), Government purchases (G), and Net exports (NX).
2. Step 2: Identify each option in terms of these components. Consumer spending on goods and services falls under 'C', government purchases of goods and services fall under 'G', and business investment in equipment and structures falls under 'I'.
3. Step 3: Recognize what transfer payments are. Transfer payments, such as Social Security, are payments made by the government to individuals without any goods or services being received in return.
4. Step 4: Understand why transfer payments are excluded from GDP. Since transfer payments do not correspond to the purchase of goods or services, they are not counted as part of government spending in GDP calculations.
5. Step 5: Conclude that transfer payments are NOT considered a component of GDP because they do not reflect production or expenditure on goods and services.