Part I
GDP is an economic measure of a country’s national income and output within a specific period. GDP can be calculated in three ways; these include the production, income, and expenditure approaches. Using the expenditure approach, this paper is going to determine the GDP of country A. Expenditure approach entails calculating GDP from the addition of all of the four groups of expenditures on output. The calculations include the addition of gross consumption expenditures(C) , gross investment (I) , government expenditure (G), net exports (X – M) (EconPort, 2006).
These expenditures on output i.e. gross consumption expenditures (C), gross investment (I), government expenditure (G) and net export i.e. exports minus import (X-M) are combined in the formula GDP (Y) = C + I + G + (X-M). Country ‘A’s’ consumer consumption stands at 90000cars. Additionally, its gross private investment adds up to 10000 cars whilst the government’s purchase accounts for 25000 cars. The country’s net export is the difference between its exports of 65000 cars and imports of 50000 cars giving a net export of (65000-50000) =15000 cars. From the different categories of expenses on output, country A’s GDP (Y) is 90000 cars + 10000 cars + 25000 cars + 15000 cars =140000 cars. At 64.29 %, consumer consumption is the largest component of the country’s GDP. This is followed by government spending at 17.86%, and this in turn, precedes net export at 10.71%. At 7.14%, business investment is the last item on this list. Any country’s GDP per capita is derived by dividing its GDP by its total population. In this case, the GDP per capita is 140000 cars divided by 500000 people, equaling 0.28 cars per person.
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Owing to Keynesian economics, the requirement to invest or to save depends on prevailing interest rates. On the other hand the consumers’ tendency to consume is dependent on the level of income of consumers. From this, increase in consumer income directly corresponds in their ability to spend. Increases in consumer income increase investment which leads to GDP growth. Consumption and income move in the same direction. Taking our example, increase in government spending will cause a subsequent increase in consumer income. This will lead to increase in private saving and investment hence GDP growth.
Part II
Going by the national income and product accounts (NIPAs), 2016, US’s GDP did increase by 2.9% in the third quarter of 2016 to $18,651.2 billion. This positive growth was as a result of an upturn in private inventory, increase in net export, together with an upturn in federal government spending (Bureau of Economic Analysis, 2016). Given the prevailing economic conditions, exemplified by an economic growth of 2.9%, and a bullish stock market, the US economy is undergoing the expansion phase of the business cycle.
At 68.9%, personal consumer spending is the largest component of the US’s GDP; this reflects an increased consumer spending. The smallest component of US’s GDP is net export of goods at 2.7%. This has marginally grown compared to second quarter’s performance. As per the third quarter’s report, personal consumer expenditure, as it grew by 2.9% relative to the preceding year, is the fasted growing US GDP component. Of all the changes registered in the quarter, this was the highest. This positive change in the course of the quarter was instigated by increases in personal income and conversely, also by decreases in price of such key products as energy and food. Additionally, whilst the number of exports increased, the nonresidential fixed investment experienced a slight reduction. Cumulatively, these explain the increase in consumer disposable income.
A price index measures the prices of both the goods and the services that are produced within an economy. The US’s price index on gross domestic purchase grew by more than 2.1% in the first month of third quarter. Mainly, this increase was the result of an improvement in terms of consumer disposable income such that, more people can comfortably pay and pay more for goods and services. Government expenditure has also caused the increase in price index.
References
Bureau of Economic Analysis (2016). National Income and Product Accounts Gross Domestic Product: Third Quarter 2016 (Advance Estimate). Retrieved from http://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm
EconPort (2006). Expenditures Approach to Calculating GD. Retrieved from http://www.econport.org/content/handbook/NatIncAccount/CalculatingGDP/Expenditures.html
