Question

1. What’s the difference between real and nominal GDP?

2. What are the four elements of GDP? Which is the most important?

3. What is the formula for the expenditures method and does it involve all income earned from sources in a country, or all expenses incurred from sources in a country?

Answer 1

(1). The GDP is the value of all final goods and services produced in a year within the country. The nominal GDP is the value of all final goods and services expressed in terms of the prices of the year for which the GDP is being calculated. The real GDP is the value of all final goods and services expressed in terms of the prices of the selected base year. The comparison between a standard of living of two periods is best suited if the nominal GDP is accounted for inflation. As for price level changes from year to year, the nominal GDP differ significantly when accounted for rising in price.

(2). The four element of GDP is

1. Personal consumption expenditures.
2. Investment.
3. Net exports.
4. Government expenditure.

(3). Economists and policymaker care not only about the economy's total output of goods and service but also about the allocation of this output among alternative uses. The national income accounts divide GDP into four broad categories of spending:-

• Consumption (C)
• Investment (I)
• Government purchases (G)
• Net exports (NX)

Thus, letting Y stand for GDP

                                                     Y = C + I + G + NX