AP Macroeconomics: Economic Indicators and the Business Cycle Quiz (Part II)

What is the formula for calculating GDP using the expenditure approach?

GDP = C + I + G + (X - M)

What does 'C' represent in the expenditure approach to GDP?

C represents Consumption, which is spending by households on goods and services.

What does 'I' stand for in the GDP expenditure approach?

I stands for Investment, which includes spending by businesses on capital goods, new housing construction, and inventory changes.

What is included in Government Spending (G) when calculating GDP?

Government Spending (G) includes spending by all levels of government on goods and services, excluding transfer payments.

What are Net Exports in the context of GDP calculation?

Net Exports are the value of exports minus the value of imports (X - M).

How does the income approach to GDP calculation differ from the expenditure approach?

The income approach sums all incomes earned by factors of production, while the expenditure approach sums total spending on final goods and services.

What are the main types of income considered in the income approach to GDP?

Wages, rent, interest, profit, indirect business taxes, and depreciation.

Why are transfer payments like social security excluded from GDP calculations?

Transfer payments do not reflect the production of new goods or services, but rather a redistribution of existing income.

What is depreciation in the context of GDP calculations?

Depreciation (or Consumption of Fixed Capital) represents the wear and tear on capital goods.

What is the significance of distinguishing between expenditure and income approaches in GDP calculation?

Understanding the distinction helps clarify how total spending relates to total income in an economy.