Question

1. Define GDP and the components of GDP. How is GDP computed? What is the difference between money GDP and real GDP? Why are we concerned about this difference?

2 . Discuss the following: The consumer drives the US economy? Explain.

3. What is inflation and how does it differ from deflation. How do we measure the inflation rate?

4. Why is a high inflation rate harmful?

Answer 1

1. GDP is the market value of final goods and services produced within the domestic territory of a country during one year. Components of GDP are Consumption expenditure, investment spending, government expenditure and net exports.

a) Private Final Consumption Expenditure: It refers to expenditure on final goods and services by the individuals, households, and non-profit private institutions serving society. It includes: consumer services, consumer non durable goods and consumer durable goods.

b) Government final consumption expenditure (G): It refers to expenditure on final goods and services by the Government like expenditure on purchase of goods for consumption by the defence personnel.

c) Investment expenditure (I): It refers to expenditure on final goods and services by the producers. Example: expenditure by the farmers on the purchase of tractors or thrashers. It includes fixed investment and inventory investment.

d) Net exports refers to the difference between exports and imports during an accounting year. Exports are an expenditure by the foreigners on the domestically produced final goods and services while imports are an expenditure on the goods and services produced abroad.

GDP = Consumption + Investment + Government spending + Net exports

Money GDP is the money value of goods and services produced in an economy during a period of time. Real GDP is the value in terms of goods and services produced in an economy during period of time.