Question

Please define and briefly describe the term GDP, provide the expenditure approach formula to measure GDP and answer the three questions related to GDP below.

GDP:

Formula (Expenditure Approach):    ____________________________________________

          ____________________________________________

As per the definition of GDP, if Mohammed Qhatani, a Saudi Citizen, develops a successful app in the US, the GDP of Saudi Arabia:

□ Increases                                       □ Decreases                         □ Stays constant      

As per the Expenditure Approach Formula, if you purchase an iPhone (produced abroad, assume no local retail margin or VAT) in Saudi Arabia, the GDP of Saudi Arabia:

□ Increases                                       □ Decreases                         □ Stays constant      

Answer 1

GDP refers to the money value of all goods and services that are produced within the country during specified period of time. GDP is calculated on annual basis as well as on quarterly basis. Higher GDP reflects increase in national output, higher economic growth, more employment and better standard of living. GDP act as a tool for Investors, Businesses, government for investment and strategic decision making.

Expenditure method

The most widely used method to calculate GDP is expenditure method. This method aims to collect data on expenditure side by adding household spending, government spending, business investment and Net exports.

GDP by Expenditure Method = personal consumption Expenditure + Gross private Investment + Government Spending + Net Exports (Export - Import)

a. The GDP of Saudi Arabia will “stays constant”

GDP includes value of goods and services produced within the domestic boundary of the country. Here the app is developed in US and it will form part of US GDP.

b. The GDP of Saudi Arabia “will decrease”

Buying I phone produced abroad, will be counted in imports and imports get subtracted from GDP formula.