Question

b. In the country of Hypothetica, we have the following information for the year 2015:

*Consumption totalled $2 billion, but 25% of this total consisted of goods which were initially sold in 2014.

*A total of $250 million worth of new housing stock was sold.

*Labour wage income was $150 million. *Businesses invested $100 million dollars in new capital (i.e. machinery) stock.

*Businesses also bought $200 million dollars worth of company shares on the stock exchange.

*Foreigners with working visas living in foreign-only households bought $100 million worth of locally made goods and services.

*The government spent $500 million building roads.

*Hypothetica is a closed economy, thus they are no exports and imports.

(i) Calculate and explain how you obtained the figure (i.e. what did you count, and what did you exclude) for Hypothetica’s consumption in 2015

(ii) Calculate and explain how you obtained the figure (i.e. what did you count, and what did you exclude) for Hypothetica’s investment in 2015

(iii) What was Hypothetica’s GDP in 2015 using the expenditure method? Explain your answer

Answer 1

i) GDP according to the expenditure method is the sum of consumption expenditure and investment expenditure against the goods and services produced during a given financial year.

For Hypothetica the total consumption expenditure is given as 2 billion and 25 % of the same is against goods and services produced during the previous year.So to find out the current year's consumption (of 2015) the consumption expenditure of the previous year has to be deducted.Therefore the total consumption expenditure of Hypothetica in 2015 amounts to 2billion - 0.5 billion (25 % of 2 bilion) = 1.5 billion.

The consumption of foreign nationals worth 100 million is a part of consumption expenditure but did not add it because it is assumed that it is already added in the total consumption expenditure.

ii) Total Investment expenditure of Hypothetica is the sum of residential investment, business investment and government investment.So given the addition to housing stock 250 million $,business investment of 100 million $ and the government investment of 500 million$ will be included as investment expenditures and the purchase of shares worth 200 million will not be included as it is only an ownership transfer and there is no expenditure involved against the produced goods and services.

The total investment expenditure of Hypothetica amounts to 250 million (addition to housing stock) + 100 million (business capital investment) + 500 million (government investment) = 850 million $.

iii) GDP of Hypothetica for the year 2015 is the sum of consumption expenditure and the investment expenditure, i.e. 1.5 billion consumption expenditure + 850 million (0.85 billion) Investment expenditure =  2.35 billion $

GDP according to the expenditure method shows how the goods and services produced in a country during a financial year are disposed off into final consumption expenditure and the final capital expenditure.