Question

Answer the following questions related to GDP

1. What is the relationship between savings, capital formation, and consumption?

2. GDP is defined as the market value of all final goods and services produced within a country in a given period of time. In spite of this definition, some production is left out of GDP. Explain why some final goods and services are not included.

3. Explain why the value of intermediate goods produced and sold during the year are not included separately as part of GDP, but intermediate goods produced and not sold are included separately as part of GDP.

4. Use the data below to find out the growth of income per person (over the entire period, not an annual basis) between the two years listed.

Year	Real GDP (1996 prices)	Population
2000	$4,915,600 million	233 million
2007	$9,243,800 million	283.5 million

5. Suppose you know that Canada's GDP in 1999 was $900 billion, and Canada's GDP in 1933 was $9 billion. What judgment about the change in the economic well-being of average Canadians could you make? Explain.

Answer 1

Answer (a)

Saving, capital formation and consumption are related and economic activities, as we know household by giving his services earns his income which is consumed or saved in certain extent. What we save currently we invest in future to raise the further industry or infrastructure. When we save , we deposit in bank or in other saving scheme , that money is utilized by government or private investor to establish further industry or develop social and economical infrastructure. so income leads to consumption and saving and saving leades to investment that ultimtely leads to capital formation.

(2) basically we can not include the services of mother or production through illegal activities as both are not measure in monetary term , mother provide 24 *7 services to their family member but we don’t pay any thing to them so inclusion of services of mother are not being part of GDP and same like production through illegal activities are not being part of gdp

(3)

Because we include value of final goods and services in gdp not intermediate and the intermediate good is produced but not sold during the year, its value is included as inventory investment which is part of production and residual from selling so we include it as inventory for closing and opening stock.

(4)

Growth of income per person= real GDP/ population

Year 2000= 4915600/233

= $21.096/ per person

Year 2007= 9243800/283.5

= $32605/ per person