Question

Which of the following is NOT a component of Gross Domestic Product?

• A. Investment
• B. Rental Income
• C. Transfer Payments
• D. Wages and Salaries

Answer 1

The Correct Option is C

To solve this question, we need to understand the components of Gross Domestic Product (GDP). GDP is a measure of the economic performance of a country and is calculated as the total value of goods and services produced over a specific time period. The most common formula for GDP is:

GDP = C + I + G + (X - M)

where:

• C = Consumption Expenditure
• I = Investment
• G = Government Spending
• X = Exports
• M = Imports

GDP can also be looked at from an income perspective, comprising:

• Wages and Salaries
• Rents, including Rental Income
• Interests
• Profits

Now, analyzing the given options:

• Investment: Part of GDP as it represent spending on goods and services that will be used for future production.
• Rental Income: Income derived from renting properties is considered a part of the income generated by the economy.
• Transfer Payments: Payments made without any goods or services being received in return, such as pensions, unemployment benefits, and other social welfare payments. These are not part of GDP since they do not reflect the production of goods or services.
• Wages and Salaries: The largest component of income in the GDP calculation, received by households from businesses.

Given this breakdown, Transfer Payments is not considered a component of GDP since it does not reflect economic production. Thus, the correct answer is:

Transfer Payments