Question

1. Explain the difference between the Expenditure and Income Approaches to Gross National Product (GDP) and what their respective component elements are, and why they are supposed to be equal to each other (if all the correct numbers have been assigned to each of the categories on the two sides).

2. In 2019, it was estimated that people in the civilian or private sector may have purchased over 14 million firearms in the United States. And the total dollar value of those purchases came to more than $70 billion. Suppose that there were to be a new constitutional amendment that repealed the Second Amendment to the U.S. Constitution, so that it became illegal for private citizens to own any type of firearm, and everyone was required to turn in their firearms to the federal government under penalty of fine and imprisonment.

But, suppose that people still wanted to own firearms, and there emerged a very active and countrywide black market in the production, purchase, and sale of illegal guns of various types. How would this all affect the expenditure and income official statistics, in terms of measurements of GDP in the United States? Would we want to say that GDP was not $70 billion smaller? What categories within the Expenditure and Income Approaches of GDP would be different after such a ban on firearms? Why?

If this kind of situation arose in the United States, what do you think the black-market price of various firearms would be compared to before when it was legal for U.S. citizens to own them? Would the price of firearms under such an ownership ban, in general, be higher or lower than before such a new amendment to the Constitution? Why? How do you think this would affect law enforcement in trying to track down ownership of a firearm after a violent crime as been committed? Why?

Answer 1

Answer - In the expenditure approach of the calculation of GDP we add up the expenditures of different sectors of economy i.e household sector , business sector , government sector and the foriegn sector. This is calculated as Consumption + investment + government spending + net export

On the other hand the income method measures the GDP on the basis of the income earned by people from the different sectors i.e own business , employed , interest , rent , profits etc. It can be calculated as Mixed income + operating surplus + compensation of the employees + consumption of fixed capital + net indirect taxes

The value of GDP in both the cases is the same because of the circular flow of income model. This means that the expenditure of one sector becomes the income of the other sector. The expenditure done by household is income for the firm and the government and vice a versa thus giving the same value of GDP with all the approaches.