Question

Write out the GDP identity and briefly explain what each component means

Answer 1

GDP (gross domestic product) is the value of all finished goods and services in an economy. It can be expressed as the following -
Y = C + I + G + (X-M)
where, Y is the GDP or the total output of an economy.
C is the consumption function. This is the money spent by the households on consumption of durable and non-durable goods and services like medical care, education, public transportation, etc.
I is the investment function. It is referred to the capital goods purchased by the business owners, to produce goods in the economy. This includes the purchase of new machines, new production inputs such as raw materials, new buildings and infrastructure, and also the money spent on research and innovation of new goods, etc.
G consitutes all the government spending; i.e. money spent by a government to provide goods and services to the public sector such as education,healthcare,public transport,etc. This basically includes all investments, purchases and transfers made by the state,central and local government bodies. X-M denotes the net exports,i.e. the difference between exports and imports. The face value of all goods and services exported to other countries minus that of all goods and services received from other countries constitute net exports.