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Assume that Country A has a population of 500,000 and only produces one good—cars Answer

Assume that Country A has a population of 500,000 and only produces one good—cars. Country A produces 100,000 cars per year. The people in Country A purchase 90,000 cars, but there are not enough cars to fulfill all the demand. They decide to import 50,000 more. The government buys 25,000 cars for its police force, and 10,000 cars are bought by companies to transport employees to other locations to work. They also export 65,000 cars to nearby countries for sale.

What is Country A’s GDP?

What is the composition of GDP by percentage?

What is the GDP per capita?

How does this relate to Keynesian economics?

Part II Go to the Bureau of Economic Analysis on the Department of Commerce’s Web site, and look up the latest new release for real GDP. Address the following questions after reading the latest release:

Where are we in the business cycle?

What is the real GDP today?

What is the largest component of GDP?

What is the smallest component of GDP?

What is the fastest growing component of GDP and why?

What components of GDP were involved in the change from last month to this month?

What is the price index today?

What caused the change?

 

 

Part-I

Given:

Population = 500,000

Consumption C = 90,000 cars

Import = 50,000

Government expenditure G = 25,000 cars

Business Investment I = 10,000 cars

Export = 65,000 cars

 What is Country A’s GDP?

GDP is calculated as:

GDP = C+I+G+Net Export

GDP = C+I+G+(Export – Import)

= 90,000+10,000+25,000+(65,000-50,000) = 140,000 cars

What is the composition of GDP by percentage?

Percentage of consumption = C/GDP = 90,000/140,000 = 64.29%

Percentage of business investment = I/GDP = 7.14%

Percentage of Government expenditure = G/GDP = 17.85%

Percentage of net export = (Export-Import)/GDP = 10.71%

What is the GDP per capita?

GDP Per capita = GDP/Population = 140,000/500,000 = 0.28 cars

If government purchases go up in the short run, what happens to GDP?

Government Purchase (G) is an important component of GDP. When G goes up, GDP also increases. But, in short run increase in government spending may not have significant impact on GDP as supply may not increase to meet increased government purchases. To meet the increased demand from government, country will have to import. Thus, positive impact of increase in government purchase would be partially negated by increase in import (as increase in import reduces net export). But in long term, domestic supply will increase to meet increased demand from government. This will reduce import and increase GDP significantly.

If consumption and government purchases go up, what happens to GDP in the long run? Why?

Increase in consumption (C ) and government purchases (G) increases GDP in long run. To meet the increased demand from consumers and government, production is increased. Increase in production increases business investment (I). The increase in production also increases employment opportunities and hence disposable income in the hands of consumers increases. The consumers spend a part of the increased income on consumption (which is determined by MPC), and hence consumption further increases. In long run, the GDP will increase significantly.

Part-II

Where are we in the business cycle?

A business cycle is defined as a process by which the economy grows, contracts, and recovers over time. An economy goes through all these phases and process repeats itself. An economy grows in expansion phase and reaches peak. After that it begins to contract and reaches trough, and then again recovers and starts growing.

Presently we are in recovery phase of business cycle. After financial crisis of 2008 and recent debt crisis in Eurozone, economy is recovering. Demand has started to rise, production has increased, unemployment level has come down. Businesses have become optimistic and started investing. Consumer confidence level has gone up. . Real GDP has increased by 2.5 percent in the second quarter of 2013. The price index also rose by 0.9% in second quarter quarter. Real personal consumption expenditure increased by 2.7% during second quarter. (BEA, 2013) Thus, we are in recovery phase of business cycle.

 

What is the real GDP today?

The real GDP of USA is $13.75 trillion.

What is the largest component of GDP?

The largest component of GDP is personal consumption ($9.75 trillion)

What is the smallest component of GDP?

The smallest component of GDP is Net Export. Net export of USA is negative.

What is the fastest growing component of GDP and why?

The fastest growing component of GDP is Gross private domestic investment. In recovery phase, businesses become optimistic and invest more. The government policies are also supportive,. So, business investment grows at high rate. .

What components of GDP were involved in the change from last month to this month?

The main contributors in change in GDP from last month to this month are personal consumption expenditure, and Gross private domestic investment.

What is the price index today?

Price index today: 116.416

What caused the change?

Personal consumption expenditures (2.4%), Gross private domestic investment (1.16%), Net export (-0.21%), Import (1.9%), Government consumption and gross investment (-0.97%)

 

 

References

BEA. (2013). National Income and Product Accounts; Gross Domestic Product, 1st quarter 2013 (second estimate);Corporate Profits, 1st quarter 2013 (preliminary estimate). Retrieved From: http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm

 

BEA(2013). National Data. Retrieved From: http://www.bea.gov/scb/pdf/2013/06%20June/D%20Pages/0613dpg_a.pdf