Question

Short Essay Question​ - GDP​ (10 pts)  

​Note: This question on the test will be graded manually.

One of the key macroeconomic variables that you have studied in this course is gross domestic product

​(GDP).

This macroeconomic variable has been in the economic news headlines frequently here in the US and around the world during this current global​ COVID-19 pandemic. As data are collected and early estimates of GDP​ released, we do not yet know the full extent to which the​ COVID-19 pandemic has affected the US economy. ​ However, early reports provide some evidence that GDP in the US and around the world has​ been, and will continue to​ be, greatly affected.

One approach to measuring GDP is to divide it into four major categories of​ expenditures: consumption,​ investment, government expenditures and net exports. Briefly explain how the​ COVID-19 pandemic has affected 3 of the 4 categories of expenditures of GDP. Comment on the direction and magnitude of the impact to each of the three types of expenditure you discuss. Label each part as​ a, b and c. 

Answer 1

Answer

Impact on the following categories of expenditure (primarily in USA) is:

a) Consumption

Consumption makes up 70% of America’s gross domestic product (GDP), but consumption has slumped as businesses close and as households hold off on major purchases as they worry about their finances and their jobs. The jump in income insecurity as reflected in an unprecedented rise in the unemployment rate is a reason for the fall in consumption.

b) Investment

Investment makes up 20% of GDP, but businesses are putting off investment as they wait for clarity on the full cost of COVID-19.

c) Net Exports

As per WTO, World trade is expected to fall by between 13% and 32% in 2020 as the COVID 19 pandemic disrupts normal economic activity and life around the world.
The US goods trade deficit increased by the most in more than a year in March as a record drop in exports offset a shrinking import bill, suggesting the novel coronavirus outbreak was upending the global flow of goods and services. The trade deficit jumped 11.6 per cent, the largest rise since December 2018, to $44.4 billion.