Registered Environmental Manager (REM) Practice Exam

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How is GDP calculated?

  1. Consumption + saving + investment + imports

  2. Consumption + investment + government spending + (exports - imports)

  3. Government spending + exports - imports + savings

  4. Investment + exports + consumption - tariffs

The correct answer is: Consumption + investment + government spending + (exports - imports)

Gross Domestic Product (GDP) represents the total monetary value of all finished goods and services produced within a country's borders in a specific time period. The widely accepted method for calculating GDP is through the expenditure approach, which considers the total spending on the country's final goods and services. The correct option includes four main components: consumption, investment, government spending, and the net exports (which is exports minus imports). - Consumption refers to all private expenditures by households and non-profit institutions on goods and services. - Investment encompasses business investments in equipment and structures, as well as residential construction and changes in business inventories. - Government spending includes all government consumption and investment but excludes transfer payments like pensions and unemployment benefits, as those are not payments for goods or services. - Net exports represent the value of a country's exports minus the value of its imports, accounting for the goods and services produced domestically that are consumed outside the country versus those produced abroad that are consumed domestically. This formula captures the full economic activity from both domestic and foreign interactions in the economy. Other options lack one or more of these critical elements, leading to an incomplete representation of the economic output.