Question

A newspaper article informs you that most businesses reduced production in the last quarter but also sold from their inventories during the last quarter. Based on this information GDP likely
a. increased.
b. decreased.
c. stayed the same.
d. may have increased, decreased, or stayed the same

Answer 1

Answer:

The correct answer is B: decreased

Explanation:

Gross Domestic Product (GDP) is the sum of all the finished goods and services produced in a specific period, based on the market value of such items. The data sets are net of inflation, they are calculated adjusting for price changes.

The formula is as follow:

GDP = C + I + G + NX

GDP is the sum of consumer spending C, Investments I, Government spending G, and net exports NX.

Inventory level itself is not part of GDP; however, changes in inventory does affect GDP by affecting investments. So if a corporation chooses to build up its inventory by amount X, it essentially makes an expenditure that increases I by X. Inventory will increase when a company produces more than what it sells.

So a reduction in production affects I, reducing GDP.

Answer 2

Answer:

The correct answer is letter "B": decreased.

Explanation:

The Gross Domestic Product or GDP represents the overall market value of all nation-produced goods and services and calculates the performance of the economy. It is calculated using the following formula:

GDP = C +  G + I + NX

Where:

• C: private consumption or consumer spending
• G: government spending
• I: businesses' capital spending
• NX: net exports (exports - imports)

In the example, if businesses decreased their production, capital spending (I) will be lowered. Thus, if the other factors remained the same, the GDP is likely to decrease during that quarter.