Question : Gross Domestic Product (GDP) is calculated by adding ______ to ______.

 

Option 1: consumption, investment

Option 2: imports, exports

Option 3: investment, consumption

Option 4: exports, imports

Correct Answer: consumption, investment

Solution : The correct answer is (a) consumption, investment.

Gross Domestic Product (GDP) is a measure of the total value of all final goods and services produced within a country's borders during a specific period, typically a year. GDP is calculated by adding two components: consumption and investment.

Consumption refers to the expenditure by households on goods and services for their final use or consumption. It includes purchases of items such as food, clothing, housing, transportation, and other consumer goods and services. Consumption is a significant driver of economic activity and is considered a key component of GDP.

Investment, on the other hand, refers to expenditures made by businesses and the government on capital goods, such as machinery, equipment, buildings, and infrastructure. Investment includes spending on fixed assets that are used to produce goods and services in the future. It also includes changes in inventories, which represent goods that have been produced but not yet sold. Investment contributes to economic growth and is an important factor in determining the overall level of GDP.

By adding consumption and investment, GDP captures the total expenditure on both consumer goods and investment goods within an economy. Other components, such as government spending (which includes both consumption and investment) and net exports (exports minus imports), may also be considered when calculating GDP using different approaches, but the basic formula for GDP calculation involves the sum of consumption and investment.