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Understanding Business Cycles: practice question

Economics · Understanding Business Cycles · Question ID eco1-6

For the year just ended, the economy of Maravia reports consumption spending of $820 billion, gross private investment of $240 billion, government purchases of $190 billion, exports of $160 billion, and imports of $210 billion. Using the expenditure approach, Maravia's GDP is closest to:

  1. $1,410 billion
  2. $1,200 billion
  3. $1,620 billion
Show answer and explanation

Correct answer: B

Working: GDP = C + I + G + (X - M) = 820 + 240 + 190 + (160 - 210) = 1,200

Explanation: The expenditure approach counts net exports, exports minus imports, so GDP = 820 + 240 + 190 + (160 - 210) = 1,200. A leaves imports in without subtracting them, overstating GDP by counting foreign-produced goods as domestic output. C adds imports as a positive component on top of exports, doubling the error.

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Original, unofficial practice material; not a CFA Institute question.