A country's imports of goods and services are larger than its exports. In the expenditure method of calculating its GDP, this means that:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → GDP is smaller than C + I + G
GDP = C + I + G + (X − M). When imports are larger than exports, X − M is negative, so GDP is smaller than C + I + G.
Option (1) GDP is smaller than C + I + G — Correct. A negative X − M is subtracted from C + I + G.
Option (2) GDP is larger than C + I + G — Incorrect. GDP would be larger only if exports were larger than imports.
Option (3) GDP is equal to C + I + G — Incorrect. GDP equals C + I + G only when exports and imports are equal.
Option (4) GDP is equal to C + I + G + M — Incorrect. Imports are subtracted, not added, since C, I and G already include spending on imports.
This question uses National Income Accounting and Open Economy Macroeconomics together.
NCERT (2026-27): “We know, GDP ≡ Sum total of all the final expenditure received by the firms in the economy. In other words GDP ≡ … C + Ι + G + X – M (2.4) Equation (2.4) expresses GDP according to the expenditure method.” “2.2.2 Expenditure Method … Let Cm denote expenditure on the imports of consumption goods. Therefore C – Cm denotes that part of aggregate final consumption expenditure that is spent on the domestic firms. …” “Chapter 6: Open Economy Macroeconomics – 6.1.1 Current Account: … Balance of Trade (BOT) is the difference between the value of exports and value of imports of goods of a country in a given period of time. Export of goods is entered as a credit item in BOT, whereas import of goods is entered as a debit item in BOT. It is also known as Trade Balance. BOT is said to be in balance when exports of goods are equal to the imports of goods. Surplus BOT or Trade surplus will arise if country exports more goods than what it imports. Whereas, Deficit BOT or Trade deficit will arise if a country imports more goods than what it exports. …” |