Consumption spending by households is the largest component of U.S. GDP measured by expenditure.
Correct Answer
True
True. Consumption is larger than investment, government purchases or net exports in U.S. GDP. It also changes more gradually than investment does.
Category: Expenditure Approach
Question 2
Buying shares of stock in a company counts as investment in GDP.
Correct Answer
False
False. Buying stock is a financial transaction that transfers ownership and produces nothing new. Investment in GDP is spending on new physical capital such as equipment, structures and inventories.
Category: Expenditure Approach
Question 3
In the base year, nominal GDP and real GDP are equal.
Correct Answer
True
True. Real GDP is measured in base-year prices and the price index equals 100 in that year. Dividing nominal GDP by 100/100 leaves it unchanged, so the two measures match.
Category: Real and Nominal GDP
Question 4
A private sale of a used bicycle between two neighbors adds its price to this year's GDP.
Correct Answer
False
False. The bicycle was counted in GDP in the year it was produced. Reselling it moves an existing good to a new owner without creating new output, so the sale is not counted again.
Category: What GDP Counts
Question 5
Rebuilding homes after a hurricane raises GDP even though the spending only replaces what the storm destroyed.
Correct Answer
True
True. Construction spending is counted in GDP no matter why it happens. This shows that a rise in GDP does not always mean people are better off.
Category: GDP and Well-Being
Question 6
Because GDP per capita is an average, it shows how evenly income is shared among a country's people.
Correct Answer
False
False. An average says nothing about distribution. Two countries with the same GDP per capita can have very different levels of income inequality.
Category: GDP and Well-Being
Question 7
A recession is a significant decline in real GDP.
Correct Answer
True
True. A recession is a significant fall in a country's real output, which usually comes with rising unemployment. An especially long and deep recession is called a depression.
Category: Business Cycle
Question 8
The period from a trough to the next peak, when real GDP is rising, is called a recession.
Correct Answer
False
False. The upswing from a trough to the next peak is an expansion. A recession is the downswing from a peak to a trough.
Category: Business Cycle
Question 9
Spending on pollution-control equipment adds to GDP, but GDP does not measure whether air and water actually become cleaner.
Correct Answer
True
True. GDP records the market value of the equipment bought. It has no entry for environmental quality itself, which is one reason GDP is an incomplete measure of well-being.
Category: GDP and Well-Being
Question 10
If a country's GDP doubles while its population also doubles, its GDP per capita doubles.
Correct Answer
False
False. GDP per capita is GDP divided by population. When both double, the ratio stays the same, so GDP per capita is unchanged.
Category: Comparing Countries
Question 11
Activity in the underground economy, such as illegal trade, is generally left out of GDP because it is not recorded.
Correct Answer
True
True. GDP is built from recorded market transactions, and illegal or hidden activity is not reported. As a result, GDP understates total production in economies with a large underground sector.
Category: What GDP Counts
Question 12
If the price level rises while the quantity of output stays the same, nominal GDP does not change.
Correct Answer
False
False. Nominal GDP values output at current prices, so higher prices raise it even with no extra output. Real GDP, which removes the effect of price changes, would stay the same.
Category: Real and Nominal GDP
Question 13
The government spending component of GDP includes purchases by state and local governments, not only by the federal government.
Correct Answer
True
True. Government purchases include federal, state and local spending on goods and services, such as roads, schools and public employees' services. Transfer payments at any level are excluded.
Category: Expenditure Approach
Question 14
Construction of new houses is counted as consumption in GDP.
Correct Answer
False
False. Residential construction is counted as investment, along with business equipment, nonresidential structures and changes in inventories. Consumption covers household purchases of other goods and services.
Category: Expenditure Approach
Question 15
GDP can be measured either by adding spending on final goods and services or by adding the income earned from producing them, and both methods should give the same total.
Correct Answer
True
True. Every dollar spent on final output is received by someone as wages, interest, rent or profit. So the spending total and the income total measure the same production.
Category: GDP and Related Measures
Question 16
On the production side of U.S. GDP, goods make up a larger share than services.
Correct Answer
False
False. Services such as health care, education and finance make up the largest part of U.S. output, larger than durable goods, nondurable goods and structures. Their share has grown over time.
Category: What GDP Counts
Question 17
The GDP deflator is a price index that covers all final goods and services produced in the economy.
Correct Answer
True
True. The GDP deflator measures the average price level of everything counted in GDP. Dividing nominal GDP by the deflator divided by 100 gives real GDP.
Category: Real and Nominal GDP
Question 18
PPP-equivalent exchange rates change from day to day with trading in foreign exchange markets.
Correct Answer
False
False. Market exchange rates move daily with currency trading. PPP-equivalent rates are a longer-run measure based on what money can buy, which is why economists usually use them for cross-country GDP comparisons.
Category: Comparing Countries
Question 19
Employment tends to rise when real GDP rises.
Correct Answer
True
True. Producing more output generally requires more workers, so real GDP and employment move together. During recessions, falling output usually comes with layoffs and higher unemployment.
Category: Business Cycle
Question 20
When the price level has been rising, real GDP in a year after the base year is greater than nominal GDP.
Correct Answer
False
False. With prices higher than in the base year, the deflator is above 100, so dividing nominal GDP by it makes real GDP smaller than nominal GDP. Real GDP exceeds nominal GDP only in years when prices were lower than in the base year.
Category: Real and Nominal GDP