Question

8. Out of the four key components that make up GDP, which one is influenced the most by disposable income (after-tax income) and be sure to explain why?

Answer 1

Answer

Consumption spending(C) is influenced the most by disposable income.

The four key components of GDP are, consumption spending(C) by household sector , Investment spending(I) by private sector, Government spending(G) , and net exports (Exports - Imports).

Among these four components, the household consumption spending depends on the household disposable income. If the disposable income rises, then the household sector will have more money to spend, and hence, the household consumption spending rises.The rise in consumption expenditure raises the GDP. Similarly, if the disposable income falls, then the household sector will have less money to spend, and hence, the household consumption spending decreases.The decrease in consumption spending decreases the GDP.

Thus, we see that, the level of disposable income influences the consumption expenditure, which in turn influences the level of GDP.

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