Methods and Measures of GDP with Examples with MCQs

Methods and Measures of GDP with Examples:

 Gross Domestic Product (GDP) is a crucial measure of a nation's economic activity. Here's an explanation of the different methods and measures of GDP with examples:

 Methods of Calculating GDP:

 There are three main approaches to calculating GDP:

1.  Expenditure Approach: This method adds up the total final spending within the economy by different sectors:

Consumption (C): Spending by households on goods and services (e.g., groceries, rent, entertainment)

Investment (I): Spending by businesses on new capital goods and inventories (e.g., machinery, buildings, raw materials)

Government Spending (G): Spending by the government on goods and services (e.g., infrastructure, education, healthcare)

Net Exports (NX): Exports minus Imports (Exports - Imports)

 Example: If a country consumes Rs. 1000 billion worth of goods and services, invests Rs. 500 billion, has government spending of Rs. 200 billion, and exports Rs. 300 billion worth of goods and imports Rs. 250 billion, its GDP using the expenditure approach would be:

 GDP = C + I + G + NX = 1000 + 500 + 200 + (300 - 250) = Rs. 1950 billion

2.  Income Approach: This method adds up the total income earned by all factors of production in the economy:

l Wages and Salaries: Income earned by employees

l Profits: Income earned by businesses

l Rent: Income earned by landlords

l Interest: Income earned on investments

 Example: If the total wages and salaries in a country are Rs. 1200 billion, profits are Rs. 500 billion, rent is Rs. 150 billion, and interest is Rs. 100 billion, its GDP using the income approach would be:

 GDP = Wages + Profits + Rent + Interest = 1200 + 500 + 150 + 100 = Rs. 1950 billion

3.  Production Approach: This method adds up the total value added by all industries in the economy:

Value added: The difference between the value of a product and the cost of inputs used to produce it.

 Example: Suppose a farmer sells wheat for Rs. 100 but the cost of seeds, fertilizer, and labor was Rs. 60. The value added by the farmer is Rs. 40. This process is repeated for all industries, and the sum of all value added gives the GDP.

 Measures of GDP:

 There are two main measures of GDP:

1. Nominal GDP: This measures the value of final goods and services produced at current market prices. It can be affected by inflation.

2. Real GDP: This adjusts nominal GDP for inflation to provide a more accurate picture of economic growth. It measures the value of final goods and services produced at constant prices (usually from a base year).

 Example: Imagine a country's nominal GDP increases from Rs. 1000 billion to Rs. 1100 billion in one year. If inflation was 8% during that year, the real GDP would be lower than the nominal GDP, indicating no actual growth or even a slight decline.

20 MULTIPLE CHOICE QUESTIONS AND ANSWERS ON GDP

1. What is GDP?

A. Gross Domestic Product

B. Gross Development Process

C. Global Domestic Policy

D. Gross Development Profit

Answer: A. Gross Domestic Product

2. Which of the following is NOT a component of GDP?

A. Government spending

B. Net exports

C. Intermediate goods

D. Personal consumption

Answer: C. Intermediate goods

3. GDP can be measured by adding up:

A. Consumer spending, investment, government spending, and net exports

B. Consumer spending and investment only

C. Government spending and net exports only

D. Investment and government spending only

Answer: A. Consumer spending, investment, government spending, and net exports

4. Which of the following is an example of government spending that contributes to GDP?

A. Welfare payments

B. Unemployment benefits

C. Social Security payments

D. Infrastructure development

Answer: D. Infrastructure development

5. Net exports are calculated by:

A. Subtracting imports from exports

B. Adding imports to exports

C. Multiplying imports by exports

D. Dividing imports by exports

Answer: A. Subtracting imports from exports

6. Which of the following is an example of an intermediate good?

A. A new car

B. A computer chip used in a smartphone

C. A loaf of bread

D. A smartphone

Answer: B. A computer chip used in a smartphone

7. GDP does not account for:

A. The distribution of income

B. Inflation

C. Unemployment

D. All of the above

Answer: D. All of the above

8. Which of the following is a limitation of using GDP as a measure of economic performance?

A. It does not account for the underground economy

B. It does not account for environmental degradation

C. It does not account for income inequality

D. All of the above

Answer: D. All of the above

9. GDP per capita is calculated by:

A. Dividing GDP by the total population

B. Multiplying GDP by the total population

C. Adding GDP to the total population

D. Subtracting GDP from the total population

Answer: A. Dividing GDP by the total population

10. Which of the following is an example of a final good?

A. Flour used to make bread

B. A new car sold to a consumer

C. A computer chip used in a smartphone

D. Steel used in the construction of a building

Answer: B. A new car sold to a consumer

11. Which of the following is included in the calculation of GDP?

A. The value of stocks and bonds

B. The value of used goods

C. The value of government transfer payments

D. The value of financial transactions

Answer: C. The value of government transfer payments

12. Which of the following is an example of an investment in the context of GDP?

A. Buying shares of a company's stock

B. Purchasing a new house

C. Paying for a vacation

D. Buying groceries

Answer: B. Purchasing a new house

13. Real GDP is GDP adjusted for:

A. Inflation

B. Unemployment

C. Government spending

D. Net exports

Answer: A. Inflation

14. Which of the following is a method used to calculate GDP?

A. The income approach

B. The expenditure approach

C. The production approach

D. All of the above

Answer: D. All of the above

15. Nominal GDP is GDP measured in:

A. Current prices

B. Constant prices

C. Future prices

D. None of the above

Answer: A. Current prices

16. Which of the following is an example of a transfer payment?

A. Social Security benefits

B. Wages paid to government employees

C. Interest payments on government debt

D. Investment in infrastructure

Answer: A. Social Security benefits

17. Which of the following is a characteristic of GDP?

A. It is a stock variable

B. It is measured over a specific time period

C. It includes the value of all goods and services produced within a country's borders

D. It is not affected by changes in prices

Answer: C. It includes the value of all goods and services produced within a country's borders

18. Which of the following is a limitation of using GDP as a measure of economic welfare?

A. It does not account for the distribution of income

B. It does not account for non-market activities

C. It does not account for environmental degradation

D. All of the above

Answer: D. All of the above

19. Which of the following is an example of a non-market activity?

A. Buying groceries

B. Gardening in your backyard

C. Going to the movies

D. Paying for a haircut

Answer: B. Gardening in your backyard

20. Which of the following is an example of an intermediate good?

A. A loaf of bread purchased by a consumer

B. A new car purchased by a consumer

C. Steel purchased by a construction company to build a bridge

D. A computer chip purchased by a smartphone manufacturer

Answer: C. Steel purchased by a construction company to build a bridge