What is the country’s GDP for the year in $ billion? Given the following data for a hypothetical economy in a given year: Category Value Personal consumption expenditures: $50 billion Purchases...
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:
All of the answers given here are correct. The gross domestic product for this hypothetical economy would be $95 billion. To understand why this is so, we can take two approaches.
First, we can approach this by thinking about what GDP includes. GDP includes the market value of final goods or services produced within the country during a given time period. This means that we cannot include sales of second-hand goods because we would be double-counting those goods. We would have counted them once when they were sold to their “final user” (the consumer) and then again when they were sold second-hand. That would overstate how much has actually been produced. This also means that we cannot include stocks and bonds. Stocks and bonds are not goods or services. They are simply pieces of companies or of debt, not things that have been produced. Once we exclude these things from our calculation, we add the other categories up and we get $95 billion.
We can also approach this by using an equation. One equation for finding GDP (called the expenditure approach) is GDP = consumption + government purchases + investment + net exports. In this situation, the equation is
GDP = 50 + 25 + 30 – 10 = 95
The reason we subtract the 10 rather than adding it is because it is given as a negative number. That means that our country has imported more than it exported.
Thus, we get a GDP for this economy of $95 billion when we understand which categories of expenditures (second-hand sales, purchases of financial instruments) do not count as part of GDP.
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.
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
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.