Question

5. Which of the following most accurately explains why the government spending (G) component of GDP falls short of actual government expenditures?

a. The government spending component excludes fixed investment.

b. The government spending component excludes spending on research and development.

c. The government spending component excludes transfer payments because they do not represent newly produced goods and services.

d. The government spending component excludes transfer payments because they are counted in net exports.

6. If imports were not included in the calculations, the value of GDP would be

a. Overestimated

b. underestimated

9.

Study Questions and Problems #9

Indicate whether each event in the following table is or is not included in this year’s GDP.

Event	Included in GDP	Not Included in GDP
IBM paid interest on its bonds.
Eleanor buys a new car from the car dealer.
Flashy Car Company sold a used car.
A retired worker receives a Social Security payment.
Air and water pollution increase.

Answer 1

5. Since government transfer payment is not included in the computation of GDP, the government share in total GDP fall short of the actual spending by the government.

Answer: c. The government spending component excludes transfer payments because they do not represent newly produced goods and services.

6. Under expenditure method GDP is calculated by adding total expenditure in the economy. GDP= C+I+G+Nx(net export). If import is not included in the computation of GDP, the value of GDP will be overestimated. The reason is that the value of expenditure on export is net export, i. e export minus import.

Answer: a. overestimated.

Event	Included in GDP	Not included in GDP
IBM paid interest on its bonds	Included
Eleanor buys a new car from the car dealer.	Included.
Flashy Car Company sold a used car.		Not included
A retired worker receives a Social Security payment.		Not included
Air and water pollution increase.		Not included.

Interest payments on bonds issued by business firms include in GDP since they are considered to be used for the purchase of capital equipments. But the interest paid on government bonds are not counted in GDP since they are not considered to be used to purchase capital assets. IBM is a corporate business enterprises and the interest on bonds paid by it is counted.

Purchase of a new car is included in GDP computation.

Calculation of GDP excludes non production transaction like transfer payments (social security transfers)

Second hand sales are excluded from the computations of GDP since they are already counted at the year of manufacturing.

Air and water pollution is not included in GDP. The value of output produced in the economy is counted and the equipment purchased to control pollution is counted.