Question

A country’s GDP is being measured by expenditure. Various categories of expenditure are recorded as follows: Households’ spending on consumption = $100bn, Firms’ spending on capital goods = $15bn, Firms’ addition to inventories = $1bn, Government spending on services = $10bn, Government spending on capital goods = $2bn, Government transfers (social security etc) = $10bn, Exports = $12bn, Imports = $10bn. What is the correct estimate of GDP?

Answer 1

Before estimating the GDP, let us write the formula for GDP of an economy.

GDP = C + I + G + (X - M) - T

Where, C=Consumption, I=Investment, G=Government Spending, X=Import, M=Import, T=Transfer, are various type of expenditures.

A country’s GDP is being measured by expenditure. Various categories of expenditure are recorded as follows:

✓ Consumption (C):

Households’ spending on consumption = $100bn

Hence,

C = $100 billion.........(1)

✓ Investment (I):

Firms’ spending on capital goods = $15bn

Firms’ addition to inventories = $1bn

Hence,

I = $15 bn + $1 bn = $16 billion.......(2)

✓ Government Spending (G):

Government spending on services = $10bn

Government spending on capital goods = $2bn

Hence,

G = $10 bn + $2 bn = $12 billion.........(3)

✓ Net Exports (X - M):

Exports (X) = $12 billion

Imports (M) = $10 billion

Hence,

Net Exports = (X - M) = $12 bn - $10 bn

or, X - M = $2 billion...........(4)

✓ Transfers (T):

Government transfers (social security etc) = $10bn

Hence,

T = $10 billion.........(5)

Hence, from the formula of GDP, we get

GDP = C + I + G + (X - M) - T

or, GDP = $100 bn+$16 bn+$12 bn+$2 bn - $10 bn

or, GDP = $120 billion

Hence, the correct estimate of GDP = $120 billion.

Hope the solution is clear to you my friend.