List and compare the four components of the expenditure approach to calculating GDP
What will be an ideal response?
The 4 parts can be summarized according to the formula GDP = C + I + G + (X - M). The first part, C, is consumption expenditure, which measures household spending and is the largest component accounting for around 70 percent of GDP. The next category, I, is investment and refers to the purchase of new capital, the purchase of new homes and changes in inventories. This fluctuates a great deal but generally accounts for 15 to 20 percent of GDP. Next is G, which government expenditure on goods and services. This component includes purchases by all levels of government on new goods and services and is about 20 percent of GDP. The final category,
(X - M), is net exports. In it, exports are added and imports are subtracted. This component is typically negative in the United States because we typically run a trade deficit. It is generally around -1 to -5 percent or so of GDP.
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The income effect for an inferior good
A) is negative. B) is zero. C) is positive. D) could be negative, zero, or positive.
Gasoline and bicycles are substitutes in consumption. Suppose we increase the federal gasoline tax to $1 per gallon
Initially, the gasoline price rises due to the tax, and the demand curve for bicycles shifts rightward because these goods are substitutes. Then, the bicycle price rises, and the demand curve for gasoline shifts rightward. Assuming the general equilibrium is achieved in both markets after these two steps, which of the following statements is NOT true? A) Partial equilibrium analysis only focuses in the first-round changes in the gasoline market (ignoring the secondary effects that arise from changes in the bicycle market). B) Partial equilibrium analysis would predict a larger shift in the price and quantity demanded for gasoline than a general equilibrium analysis. C) The price increase in gasoline is larger under the general equilibrium approach, but the change in the quantity of gasoline demanded is smaller than under partial equilibrium analysis. D) All of these statements are true.