Question

Short Answer Questions

1. Write down the expenditure equation for GDP. Define also a trade surplus and a trade deficit, and what part of the GDP spending equation represents this.

2. Write down the income equation for GDP. Highlight which parts are labor income, and which are capital income.

3. Per Capita GDP is often used as standard of living measure in economics and policy. In words, what are economists trying to compare between nations/states? What are some drawbacks of using GDP as a consumer welfare measurement?

Answer 1

Expenditure equation for GDP is as

AD= C+I+G+(X-M)

Where C= consumption expenditures by households and firms

I= investment expenditure

G= government purchases of goods and services

X-M= net exports means exports minus imports

Trade surplus is when Exports exceed imports and conversely, when imports are greater than exports then it is trade deficit.

In the expenditure equation it is represented by net exports.

Income equation for GDP is the sum of components of income method to calculate national income NNP. It consists of compensation to employees, operating surplus includes capital and rental income, also wages and profit, mixed income from self employed.

Per capita GDP is calculated as GDP divided by the population of the economy. It is used as a standard for comparing standard of living of different nations as it reveals the measure of per person income available to spend on goods and services.  

GDP is a quantitative measure and doesnot suffice as a measure of consumer well being which required other indicators like health, education etc.