Let's use the different components of GDP from the national income accounting identity to examine the types of events that you read about in the news. First, economists and politicians frequently talk about the impact of trade on the economy. For the following problems, assume that there is no change in consumption, investment, or government expenditure.

If exports increase by $1 billion and imports increase by $1 billion, what is the change in GDP?

A.

GDP increases by $1 billion.

B.

GDP decreases by $1 billion.

C.

GDP increases by $2 billion.

D.

There is no change in GDP.

Part 2

If exports decrease by $1 billion and imports decrease by $1 billion, what is the change in GDP?

A.

GDP increases by $1 billion.

B.

GDP decreases by $1 billion.

C.

GDP increases by $2 billion.

D.

There is no change in GDP.

Part 3

If exports decrease by $1 billion and imports increase by $1 billion, what is the change in GDP?

A.

GDP increases by $1 billion.

B.

GDP decreases by $1 billion.

C.

GDP decreases by $2 billion.

D.

There is no change in GDP.

Part 4

During a recession, consumption falls as households cut back on their expenditures, either because they are out of work or because they fear they may soon lose their jobs. Governments often respond with fiscal stimulus, which usually involves an increase in government expenditures. For the following problems, assume that there is no change in investment, exports, or imports.

If consumption falls by $2 billion and government spending increases by $1 billion, what is the change in GDP?

A.

GDP increases by $1 billion.

B.

GDP decreases by $1 billion.

C.

GDP decreases by $3 billion.

D.

GDP increases by $3 billion.

E.

There is no change in GDP.

Part 5

If consumption falls by $2 billion and government spending increases by $2 billion, what is the change in GDP?

A.

GDP increases by $1 billion.

B.

GDP decreases by $1 billion.

C.

GDP decreases by $3 billion.

D.

GDP increases by $3 billion.

E.

There is no change in GDP.