Questions

Text 2

The text is followed by a set of questions. Read the text and answer the accompanying questions, basing your answers on what is stated or implied in the text.

Spending in the economy takes many froms. At any moment, the Smith family may be having lunch at Burger King; Genaral Motors may be building a car factory; the Navy may be procuring a submarine; and British Airways may be buying an airplane from Boeing. GDP includes all of these various forms of spending on domestically produced goods and services.

To understand how the economy is using its scarce resources, economists are often interested in studying the composition of GDP among various types of spending. To do this, GDP (which we denote as Y) is divided into four components: consumption (C), investment (I), government purchases (G), and net exports (NX):

We have just seen an example of each component. Consumption is spending by households on goods and services, such as the Smiths' lunch at Burger King. Investment is the purchase of capital equipment, inventories, and structures, such as the General Motors factory. Investment also includes expenditure on new housing. (By convention, expenditure on new housing is the one form of household spending categorized as investment rather than consumption.) Government purchases include spending on goods and services by local, state, and federal governments, such as the Navy's purchase of a submarine. Net exports equal the purchases of domestically produced goods by foreigners (exports) minus the domestic purchases of foreign goods (imports). A domestic firm's sale to a buyer in another country, such as the Boeing sale to British Airways, increases net exports.

1. What forms does spending in the economy take?

2. What are the components of GDP?

3. What is (are) consumption (investment, government purchases, net exports)?

4. The “net” in “net exports refers to the fact that imports are subtracted from exports, doesn’t it”?

5. Where are imports of goods and services included into?

6. Where does the salary of an Army general belong to?

7. Why don’t transfer payments reflect the economy’s production?

Ex. 1. The best title for the text is:

– Transfer payments.

– The Components of GDP.

– Consumption.

– Net Exports.

Ex. 2. Based on your understanding of the text, are the following TRUE or FALSE?

1. GDP consists of 6 components.

2. Each dollar of expenditure is placed into one of the four components of GDP.

3. Consumption is spending by households on goods and services.

4. Expenditure on new housing is the one form of household spending categorized as consumption.

5. When a domestic household, firm, or government buys a good or service from abroad, it doesn’t affect GDP.

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