Question

1. Assume the following accounts and amounts were   

    reported by a nation last year. Government Purchases of Goods and Services were US$5.5        

    Billion; Personal Consumption Expenditure were US$40.5 Billion; Gross Private Domestic   

    Investment amounted to US$20 Billion; Capital Consumption Allowances were US$4 Billion;

    Personal Savings were estimated at US$2 Billion; Imports of Goods and Services amounted

    US$6.5 Billion; and exports of Goods and Services were US$5 Billion.

1. Determine the nation’s Gross Domestic Product (GDP).
2. How would your answer change if the Dollar amounts of imports and exports were reversed?

b.Describe the MI definition of the money supply and indicate the relative significance of the MI components.

Answer 1

i) Nation's Gross Domestic Product (GDP) :

Gross Domestic Product = Government Expenditure + Consumption + Domestic Investment + Net Exports

GDP = ( 5.5 + 40.5 + 4 + 20 + 5 - 6.5 ) Billion Dollars

GDP = 68.5 Billion Dollars

*Consumption includes both personal as well as capital consumption

*Personal Savings is not included in the investments as it precludes from the definition of GDP.

*Net exports = Exports minus Imports

ii) If the amounts of exports and imports are reversed:

GDP = ( 5.5 +40.5 + 20 + 6.5 - 5 ) = 67.5 Billion Dollars

iii) M1 definition of money supply:

M1 is the supply of money which includes physical currency and coins, demand deposits, travelers checks, other deposits and negotiable order of withdrawal (NOW) accounts. The most liquid portions of the money supply are measured by M1 because it contains currency and assets that can be quickly converted to cash.

It is significant in the measurement of money supplies in the economy which is inter linked with the Gross Domestic Product and Inflationary measurements of an economy, arguably.