What is the country’s GDP for the year in $ billion?
Given the following data for a hypothetical economy in a given year:
Personal consumption expenditures:
Purchases of stocks and bonds:
Sales of secondhand items:
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When measuring GDP, you must be careful to examine all the information you have and then only calculate GDP using the components that count toward GDP. In your example here, we can start with removing the components and numbers listed that are not included when calculating GDP. Those include:
1. Puchases of stocks and bonds because we only look at transactions of final physical goods and not financial purchases.
2. Sales of secondhand items because GDP only considers new goods that have been created within the country.
What remains is:
Personal Consumption Expenditures ($50 billion) + Net Exports (-$10 billion) + Government Purchases ($30 billion) + Gross Investment ($25 billion) = GDP
So we change that to: $50 billion + $30 billion + $25 billion - $10 billion which equals a GDP of: $95 billion
Note: Net Exports is negative because net exports = exports - imports so that year the country imported more than it exported. When imports > exports, we have a negative net export which reduced GDP.
There are two methods to calculate GDP.
1. The Expenditure Approach
2. The Income Approach
GDP has been calculated using the Expenditure Approach based on information provided.
GDP = Household/ Personal Expenditure + Government purchases + Gross Investment + Net Exports
The attached table shows the calculation.
GDP = $ 95 billion
Notes to the answer:
1. The purpose of purchase of stocks and bonds is not known hence not considered.
2. Sale of second-hand goods are not expenditure, hence not considered.
The formula for calculating GDP in an open economy would be
Y = C+I+G+(X-M)
Y = GDP of the economy
C= Consumption expenditure of the households in the economy
I = Gross investments in the economy
G = Government's expenditure
(X-M) represents Net Exports with X standing for exports and M standing for imports.
It is to be noted that C includes value of those goods and services only which are produced in the year. Therefore, value of second hand goods sold will not be added.
Secondly, value of stocks and bonds purchased are not to be considered because they are not real investments ( but are financial investments).
Thus the answer here would be :-
Y = 50 + 25 +30 + (-10)
Y = $95 billion
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