Question

Write down the equation for GDP based on the national spending approach and answer the following questions.

- Does reducing imports increase GDP? Why?

- Does an increase in unemployment benefits increase the government spending component? Why?

- Does the component associated with investment include the purchase of stocks and bonds? Why?

Answer 1

Answer: GDP based on the national spending approach:

It is the sum of all the expenditure made on the goods and services in the economy within a given time period

GDP (gross domestic product)= consumption spending + investment + government spending + net exports

Net exports = export - import

1- Reducing imports will increase the GDP because decrease in imports will increase the net exports as net exports is the difference between exports and imports of the country. GDP and net exports have positive relation so if imports reduces it will increase net exports which will eventually increase GDP

2- The increase in unemployment benefits will not increase the government expenditure because unemployment benefit or any other kind of social security benefits by the government are not included in the government spending in GDP calculation as they are not given for any goods or services. so their increase or decrease will not affect the government spending or GDP

3- the component associated with investment does not include the purchase of stocks and bonds it includes formation of physical capital, inventories and construction of houses etc.