QUESTION 56 (5 marks)
A government pays an additional $10 billion of income-support transfers. Recipients initially spend 80% on newly produced domestic goods. Explain the direct and first-round consumption contributions to expenditure-measured GDP. Why should the government not record a direct $10 billion increase in G for the transfers?
Practice marking scheme
Answer
Transfers are not direct government purchases; initial domestic consumption rises by $8 billion.
Working
Transfers redistribute purchasing power without paying for newly produced goods or services, so the payment itself is not a direct GDP purchase in G. If recipients spend 0.8 × $10 billion = $8 billion on current domestic production, that expenditure contributes to C. Subsequent rounds are separate; counting both the transfer and consumption as new final purchases would double-count.
Marking criteria
- Distinguishes transfers from government final purchases. [2 marks]
- Calculates $8 billion in initial consumption. [1 mark]
- Explains GDP recording and double-counting. [2 marks]
Practice question aligned to the current QCAA syllabus; review the worked solution and marking criteria.
View the QCAA syllabusCompare your working with the guide above.