Question

1) Explain why an economy’s income must equal its expenditure. 2) List the four components of GDP. Give an example of each. 3) Why do economists use real GDP rather than nominal GDP to gauge economic well-being? 4) Explain the GDP deflator, its calculation, and its meaning. 5) Explain the inflation implication when we use GDP deflator to calculate

Answer 1

1) Income of an economy should be equal to the expenditure because every good or service is sold in the market is also bought by someone. This name the person who is buying it would be spending his income and the person who is selling it would be receiving his income hence the expenditure of one is the income of other which would mean that the income is always equal to expenditure in an economy.

2) the four components of GDP along with their examples are: 1) Consumption : spending on buying groceries

2)government expenditure: spending by government on public transport.

3)Investments : Companies spending on infrastructure.

4) Net exports : cars produced in foreign country and sold in domestic country.

Ans 3) Real GDP takes into account the actual goods and services produced in an economy which is not affected by the change in prices.

Revenue = prices of goods * quantity produced.

So if the prices increase, then also the revenue would increase even when the quantity has not increased. This would ve nominal gdp.

Real gdp would measure how the quantity of goods and services has increased and not the prices.