Questions: Components of GDP: C + I + G + NX

Question 1

Which of the following is correctly classified as Investment (I) in the GDP expenditure framework?

• A. A household buys $5,000 worth of Apple stock on the stock market
• B. A manufacturing firm spends $2 million building a new factory
• C. The federal government sends out Social Security checks totaling $1 billion
• D. An American consumer buys a $30,000 car assembled in Germany

Answer: (B)

In GDP accounting, Investment (I) means business spending on physical capital — machinery, equipment, structures, and residential construction — plus inventory changes. Buying stock is a financial transaction that transfers ownership of existing assets, not production of new goods. Social Security is a transfer payment excluded from G. The imported car is counted in C but then subtracted in NX (imports), so it does not add to GDP.

Question 2

Government transfer payments such as Social Security and unemployment insurance are included in the G (government purchases) component of GDP.

• T. True
• F. False

Answer: False

G counts only government spending on goods and services — things that directly use up resources (hiring teachers, buying tanks, funding research). Transfer payments redistribute income from taxpayers to recipients without any new production occurring. Including them would double-count the subsequent consumption spending recipients make. They affect GDP indirectly by influencing consumer spending (C), but they are not directly part of G.

Question 3

Why are imports subtracted in the NX term of GDP, even though domestic consumers really do spend money on them?

Model answer: GDP measures the value of goods and services *produced domestically*. When a domestic consumer buys an imported good, that spending is already captured in C (consumption). If imports were not subtracted, foreign production would inflate our GDP measure. Subtracting imports corrects for this: NX = Exports − Imports ensures that only domestically produced output is counted.

The expenditure formula C + I + G + NX is constructed so that every dollar of domestic production gets counted exactly once regardless of who buys it. Exports add foreign purchases of domestic production; imports remove the domestic spending that went toward foreign production. The subtraction of imports is a correction for the fact that C, I, and G are measured as total spending — including on imports — not just spending on domestic goods.