Quiz 4: Measuring GDP and Economic Growth
A final good/service is an item that is bought by the consumer. Here, consumer is the end user of the good/service. Intermediate good/service is an item which is produce by one firm and bought by other firms to use as a component/factor input in the production of another good. According to question there is given a list of items we need to identify as final good/service or intermediate good/service. • Airline ticket bought by a student is a final good and consumption expenditure • New airplanes bought by Southwest Airlines is an intermediate good as it will used to provide air service to others. It is an investment made by Southwest Airlines. • Cheese bought by Company D is an intermediate good as it is used in making pizzas. • Your purchase of new iPhone is a final good. It is classify as consumption expenditure • New house bought by Person BG is a final good. It is classify as consumption expenditure.
In the question the circular flow diagram is given. During 2014, the information given was following. Flow-A represent the total income (Y) i.e. aggregate income received by household including retained earnings. As household supply factors of production like labour, capital and in return they receive factor income like wages, rate of interest, rent and profit. Flow-B represents the consumption expenditure (C) i.e. the total payment done for goods and services consumed by household and sell by firms. Flow-C represents the Government expenditure (G) i.e. Government buy goods and services from firms. Flow-D represents Investment (I). Flow-E represents Net Exports (X-M) i.e. the value of exports (X) minus the value of imports (M). (i) GDP is equal to the aggregate income which is the total amount paid for the services of the factor of production used to produce final goods and services. The factors of production like labour, capital, land and entrepreneurship provided by household and in return firms pay wage, interest, rent and profit to household. This is the income approach to calculate GDP. Thus GDP is Flow A. GDP = flow A = $13 trillion. (ii) GDP is calculated using the formula, Substitute the following values in the equation to derive GDP, On substitution, Thus Government Expenditure (G) is equal to $1.4 trillion
GDP is the gross domestic product. The GDP is total value of final goods and services produced in an economy during a certain time period. The GDP is calculated at the market price. GDP can be ascertained in two ways, one is the income approach and the other is the expenditure approach. Both the approaches give the same GDP value. The income approach takes in consideration the income earned by the households and which is in turn spend by them to buy the goods and services in the goods market. The income earned is actually the price for employing the factors of production which are used by the firms to produce the goods and services. The expenditure approach takes in consideration the expenditures made by households, Government, firms and the rest of the world to buy the goods and services that are produced by the firms. Thus we can see that in both the approaches we are valuing the goods and services. In the income approach the firms are paying to the households for producing the goods and services whereas in the expenditure approach the households, firms, government and the rest of the world pays to the firms for consuming the goods and services produced during a certain period of time. a) The GDP calculated by the income approach and the expenditure approach are both same. Data given: Government Expenditure - $20 billion Aggregate Income - $100 billion Consumption Expenditure - $67 billion Investment - $21 billion Exports of Goods and Services - $30 billion Thus the aggregate expenditure is $100 billion. b) The GDP calculated by the income approach and the expenditure approach are both same. The GDP calculated as per the income approach constitutes of the aggregate income. …… (I) As per the expenditure approach the GDP comprises of the consumption expenditure, the government expenditure, the investments made by the firms and the net exports. Thus in this case: …… (II) Since GDP calculated from both the approaches gives the same value, we can consider equation (I) and (II) to be equal. Equating equation (I) and (II), we get: …… (III) Data given: Government Expenditure - $20 billion Aggregate Income - $100 billion Consumption Expenditure - $67 billion Investment - $21 billion Exports of Goods and Services - $30 billion Putting all the values in the equation (III): Thus the total import of goods and services is $38.