Question

Real GDP (Y) can be decomposed into the sum of spending by consumers (C), firms (I), the government (G), and net exports (X-M). Y = C + I + G + NX. A common approach taken in exploring real GDP developments is to explore how each of these four spending components identified will develop in the near future. For example, if consumer confidence (an example of a forward-looking indicator) is increasing, this is usually taken as a signal that C will be increasing at a 'healthy' growth rate in the near future. If consumer confidence is decreasing, then C is expected to be flat. Since the spending components feed into real GDP (go back to the circular flow diagram), the development of C gives some indication about near-future developments in real GDP or economic growth. Thus, one can explore expected changes in C, I, G, and NX to get a handle on the expected real GDP growth for the next quarter or year. Your assignment is to develop a report that describes expectations for US RGDP in the short term (6 months to 1 year) and medium-term (2 to 3 years). This type of macroeconomic outlook report is important and of interest to every type of business enterprise as it is the basic indicator of future output and input market conditions. Your report should be addressed to someone who has only a basic understanding of economics; thus, you should as part of your report, explain the definition of each of the spending components (any other technical terms you use). You may use charts and graphs as appropriate. The finished report should be 3 to 5 pages and include an Executive Summary of no more than 200 words.

Answer 1

Spending Components and the respective sectors of the economy:

1) Consumption expenditure: It is incurred by the household sector.

Household sector includes consumers of goods and services. Households are the owners of the factors of the production.

2) Investment expenditure: It is incurred by the producer sector.

Producer sector included all producing units in the economy. For the production of goods and services, the firms hire or purchase factors of production from the households.

3) Government expenditure: It is incurred by the government sector. It includes government consumption expenditure as well as government investment expenditure

Government sector includes government as a welfare agency and government as a producer.

4) Net exports: Exports - Imports.

It is incurred by the external sector or 'rest of the world' sector. It includes all such activities which are related to export and import of goods, and the flow of capital between the domestic economy and rest of the world.

Real GDP (Y) can be decomposed into the sum of spending by consumers (C), firms (I), the government (G) and net exports (X-M). Y = C + I + G + NX.

Explanation:

Household consumption expenditure measures demand for consumer goods.

Producer investment expenditure measures demand for producer goods which leads to the process of capital formation.

Government makes collective consumption expenditure. It refers to public consumption expenditure or consumption expenditure on behalf of the society. It includes government consumption expenditure as well as government investment expenditure.

Rest of the world sector generates demand for our goods and services in terms of our exports. Imports are also made from the rest of the world. Net exports is the difference between total exports and imports. It contributes to the aggregate demand in the domestic economy.

Expectations for US GDP in the short term (6 months to 1 year) and medium term (2 to 3 years):

The US economy signals that C will be increasing at a 'healthy' growth rate in the near future.

Consumer confidence is increasing.

It is an example of a forward looking indicator.

Diagram: Consumption expenditure in near future