Dissecting the GDP Equation

 

 

 

 

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Questions on Dissecting the GDP Equation

Part I

Assume that Country A has a population of 500,000 and only produces 1 good: cars. Country A produces 100,000 cars per year. The people in Country A purchase 90,000 cars, but there are not enough cars to fulfill all the demand. They decide to import 50,000 more. The government buys 25,000 cars for its police force, and 10,000 cars are bought by companies to transport employees to other locations to work. They also export 65,000 cars to nearby countries for sale. Discuss the following:

  • What is Country A’s GDP?

GDP= Private consumption + gross investment + government spending + (exports − imports)

GDP = 90,000 + 10,000 + 25,000 + (65,000 – 50,000)

GDP= 140,000 cars

  • What is the composition of GDP by percentage?

Private consumption=  (90,000/140,000)*100                      =64.29%

Gross investment=       10,000/140,000 *100                       =7.14%

government spending= 25,000/140,000 *100                      =17.86%

A country’s export

(Exports − imports)= (65,000-50,000)/140,000 *100      =10.71%

  • What is the GDP per capita?

GDP per capita = GDP/POPULATION

GDP per capita=140,000 / 500,000 =

GDP Per capita=.28 cars per person

  • How does this relate to Keynesian economics?

The Keynesian economics argues that in economics, most things produced are produced for sale, and sold. As a result, measuring the total expenditure of money used to buy things is a way of measuring production. This is known as the expenditure method of calculating GDP. The GDP is therefore composed of Consumption (C), Investment (I), Government Spending (G) and Net Exports (X – M). The equation can be written as
Y = C + I + G + (X − M)

Part II

Go to the Bureau of Economic Analysis at http://bea.gov/, and look up the latest new release for real GDP. Address the following questions after reading the latest release:

  • Where is the United States in the business cycle?

It is in an Expansion phase since the unemployment rate is decreasing and there is an increase in real GDP

  • What is the real GDP today?

$17,328.2 billion

  • What is the largest component of GDP?

Consumption.

  • What is the smallest component of GDP?

Net Exports

  • What is the fastest growing component of GDP, and why?

Exports. This is because of the increase in the foreign trade

  • What components of GDP were involved in the change from last month to this month?

Increases in nonresidential fixed investment and in exports

  • What is the price index today?

Consumer Price Index= $237.4 billions

Producer Price Index= $201.6 billions

  • What caused the change?

The rise in inflationary effect served as a major cause of change in the price index.