Methods of calculating national income - Expenditure Method

Correct answer: A. It is payment for a service produced during the current year.

Explanation: The old good itself was produced in an earlier year, so its full resale value is not counted as current production. A brokerage service, however, is provided by an agent during the current year and creates current economic output. The fee paid for that service is therefore included in national income or current expenditure, subject to the accounting framework. Only the value of the newly provided brokerage service is counted, not the value of the previously produced asset.

Correct answer: A. Transfer payment

Explanation: An unemployment allowance is a transfer payment because the recipient receives money without supplying a currently produced good or service to the government in return. It redistributes purchasing power but does not directly represent payment for current production. Therefore, the allowance itself is not added to national income through the expenditure method. If the recipient later spends the allowance on final goods and services, that subsequent consumption expenditure may be counted, provided the goods are domestically produced.

Correct answer: C. Purchase of previously issued shares

Explanation: The purchase of previously issued shares is a financial transaction that transfers ownership of an existing asset. It does not represent current production of a good or service, so it is excluded from GDP expenditure. Newly produced furniture is consumption expenditure, government teachers’ salaries reflect current public services, and domestically produced exports are included in GDP.

Correct answer: A. Because it is an input service for the firm

Explanation: When a firm purchases software services for use in producing other goods or services, the software is an intermediate input for that firm. Its cost is treated as intermediate consumption rather than household final consumption. The distinction depends on the purpose of use: a household’s personal software subscription may be final consumption, whereas business use supports further production and is not final household consumption.

Correct answer: A. Because it is a financial or transfer payment, not a direct purchase of current production service

Explanation: Government interest payment is generally treated as a financial or transfer payment rather than payment for a currently produced final good or service. The expenditure method includes spending on final output produced during the accounting period. Adding such interest would not represent a separate purchase of current production and could cause double counting.

Correct answer: A. Keep intermediate expenditure and transfer payments separate from final expenditure

Explanation: The expenditure method must count only expenditure on final goods and services produced during the relevant period. Intermediate purchases are already embodied in the value of final goods, so including them again causes double counting. Transfer payments do not represent payment for current production and must also be excluded.

Correct answer: A. Final consumption expenditure of households and private non-profit institutions

Explanation: Private final consumption expenditure, or PFCE, is spending by households and private non-profit institutions on final goods and services for consumption. It excludes government investment, loans, and producers’ purchases of raw materials because those items represent capital, financial, or intermediate transactions rather than private final consumption.

Correct answer: A. Because they show the foreign sector’s net expenditure on domestically produced output

Explanation: Net exports are exports minus imports, written as X − M. Exports represent foreign spending on goods and services produced domestically, while imports are domestic spending on foreign production and must be deducted. Therefore, net exports measure the foreign sector’s net contribution to expenditure on domestic output.

Correct answer: A. GDP at MP = PFCE + GFCE + GCF + (X − M)

Explanation: The expenditure formula for GDP at market price adds private final consumption expenditure, government final consumption expenditure, gross capital formation, and net exports. Thus, GDPMP = PFCE + GFCE + GCF + (X − M). The other expressions describe income, value-added, or unrelated aggregate relationships.

Correct answer: A. Paying teachers in government schools to provide education services

Explanation: Government final consumption expenditure includes the cost of final goods and services supplied by the government for collective or individual consumption, such as education services provided through government schools. Raw materials are intermediate inputs, share purchases are financial transactions, and second-hand machines do not represent current production.

Correct answer: A. Fixed capital formation and change in inventories

Explanation: Gross capital formation represents investment expenditure that adds to or maintains productive assets. It mainly includes gross fixed capital formation, such as expenditure on machinery, buildings, and equipment, together with changes in inventories or stocks. It is distinct from household consumption, wages, and taxes.

Correct answer: A. GDP will increase

Explanation: Net exports are calculated as exports minus imports, or NX = X − M. When exports exceed imports, NX is positive. Since the expenditure method measures GDP as C + I + G + (X − M), a positive net-export component increases total expenditure and therefore raises GDP, other things remaining unchanged.

Correct answer: A. Gross fixed capital formation

Explanation: A newly constructed house provides a durable productive asset and is therefore treated as fixed capital formation, even when it is purchased by a household. It is not classified as ordinary private consumption expenditure. Under the expenditure method, this investment enters GDP through gross fixed capital formation.

Correct answer: A. Because these are financial assets, not real production

Explanation: The purchase of a share or bond is a financial transaction that changes ownership of a financial claim. It does not itself represent production of a new good or service during the current period. GDP expenditure includes spending on newly produced final goods and services, while financial-asset purchases are excluded to avoid misstating output.

Correct answer: B. Purchase of new machinery by a firm

Explanation: A firm’s purchase of new machinery is expenditure on a newly produced capital good. It expands or maintains the productive capital stock and is therefore included in gross capital formation, an investment component of GDP. An old house is a resale, a pension is a transfer payment, and shares are financial assets.

Correct answer: A. Because imports are domestic expenditure on foreign production

Explanation: GDP measures the value of final production within a country’s domestic territory. Domestic households, firms, or governments may spend money on imported goods, so that spending initially appears in consumption, investment, or government expenditure. Imports are then subtracted because the related production occurred abroad, not domestically.

Correct answer: A. When closing stock is greater than opening stock

Explanation: Change in stock, also called change in inventories, is calculated as closing stock minus opening stock. Therefore, it is positive when the value of goods held in inventory at the end of the accounting period is greater than the value held at the beginning. This increase is included in gross capital formation because unsold goods produced during the period are treated as investment.

Correct answer: A. Expenditure made to buy a good or service for final use

Explanation: Final expenditure is spending on a good or service for its final use, such as household consumption or investment in a capital asset. Purchases made for resale or for use as raw material are intermediate expenditures because their value is incorporated into another product and must not be counted separately.

Correct answer: A. As investment

Explanation: Goods produced during the current period but not sold are recorded as an increase in inventories, also called change in stock. In the expenditure method, this inventory accumulation is treated as investment because it represents output retained by the firm. This ensures that current production is included even when the goods remain unsold.

Correct answer: A. Gross capital formation

Explanation: Salary paid to a domestic servant is payment for a final household service. The household’s expenditure is included in private final consumption expenditure because the service is directly consumed. It is not gross capital formation, since the payment does not create or acquire a productive capital asset such as machinery, equipment, or buildings. Therefore, option A is correct.

Correct answer: A. Government final consumption expenditure

Explanation: Routine maintenance of a public park is a current expenditure incurred by the government to provide a public service. It does not represent a household purchase, an export transaction, or the acquisition of a financial asset. In national-income accounting, government spending on current goods and services supplied to the public is classified as government final consumption expenditure. Thus, option A is correct.

Correct answer: A. Depreciation and net indirect taxes are subtracted

Explanation: GDP at market price is a gross measure, so depreciation must be subtracted to obtain a net measure. It is valued at market prices, so net indirect taxes must also be subtracted to convert market price into factor cost. Hence, NDPFC = GDPMP − depreciation − net indirect taxes. Therefore, option A is correct.

Correct answer: A. Gross capital formation will be underestimated

Explanation: Gross capital formation is broader than the purchase of new machinery. It includes gross fixed capital formation as well as changes in inventories or stocks. If stock changes are omitted, investment represented by goods produced but not yet sold, or by inventory accumulation, will not be counted. Consequently, total gross capital formation will be understated. Therefore, option A is correct.

Correct answer: A. Gross fixed capital formation

Explanation: A newly purchased computer machine used in an office is a durable capital good that provides productive services over more than one accounting period. Its purchase adds to the business’s fixed assets and expands or maintains productive capacity. It is therefore recorded as gross fixed capital formation, not household consumption, intermediate consumption, or a transfer payment. Option A is correct.

Correct answer: A. Because it is a transfer payment, not expenditure on a final good

Explanation: A scholarship is a transfer payment: money is given to the student without a current good or service being produced in direct exchange for that payment. Counting the scholarship itself would therefore not measure current production and could cause duplication. Expenditure is recorded later when the student uses the money to purchase final goods or services. Hence, option A is correct.