Part I
The gross domestic product (GDP) is the measure of value of all finished goods and services a country produces (or consumes) within a specific period of time (Callen, 2012). The measure is based not on the real value of the goods and services but on their prices or monetary value. There are three ways of calculating the GDP namely, the income approach, the production approach and the expenditure approach (Callen, 2012). From our case of country A, we are going to use the expenditure approach to determine the GDP of the country.
Expenditure approach involves the calculation of all the sum of uses of final goods and services. It includes the consumer expenditure (C), business investment (I), government spending (G) and net export i.e. exports minus import (X-M). GDP (Y) = C + I + G + (X-M). Consumer consumption in country A is 90000cars, business investment is 10000 cars and government spending is 25000 cars. The country exports 65000 cars while it imports 50000 cars hence have a net export of (65000-50000) =15000 cars. The country’s GDP (Y) is 90000 cars + 10000 cars + 25000 cars + 15000 cars =140000 cars. Consumer consumption forms the largest component of the country’s GDP at 64.29 % followed by government spending at 17.86%, then net export at 10.71% and finally business investment at 7.14%. The country’s GDP per capita i.e. a country’s GDP divided by its total population is 140000 cars ÷ 500000 people = 0.28 cars per person.
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From the Keynesian economics, the need to invest or save is dependent on interest rates or the expected rate of return. Also, consumers’ propensity to consume is heavily dependent on consumer income level. As such, whenever consumer income increases, their ability and capability to spend also increases, and this subsequently lead to increased investment leading to GDP growth. Consumption and income constantly move in similar direction. From our example, if the government increases it’s spending, the increase will come with increased consumer income which will subsequently lead to increased private saving and investment all of which will bring growth to the GDP.
Part II
According to the national income and product accounts (NIPAs), 2016, US’s GDP has increased with 1.1 % in the second quarter of 2016. This was a 0.1% reduction or difference with the second quarter’s estimate of 1.2%. The positive contributions from consumer spending and export were negatively offset by negative inventory investments, government spending and nonresidential investment. Imports also increased (Bureau of Economic Analysis, 2016). The economic growth is relatively low or stagnant. Given the current economic conditions i.e. economic growth below 2%, a bearish stock market, investors looking for safe and easy stock plus the economic slowdown, the US economy is going through a contraction phase in the business cycle.
The largest component of US’s GDP is personal consumer spending at 68.9% while the smallest component is net export of goods at -2.7%. The fastest growing component as reflected in the second quarter’s report is the personal consumer expenditure which showed a growth of 2.94% compared to the previous year. This was the highest growth/positive change registered in the quarter. This positive change was informed by the 2.3% increase in real disposable personal income following the decrease in price of key products namely, food and energy during the quarter (Bureau of Economic Analysis, 2016). The number of exports also increased while the nonresidential fixed investment reduced slightly. All these led to an increased consumer disposable income. Another component whose positive change brought the GDP growth is the slight decrease of federal spending. These increases came against other component decreasing such as the huge decease in private inventory investment and state and local government spending. Imports also increased by a huge margin (Bureau of Economic Analysis, 2016).
A price index is used to measure the prices of goods and services produced within an economy. The price index of the US’s gross domestic purchase grew by 2.1% in the second quarter after an increase of 0.2 in the first quarter. This increase was mainly caused by the improved consumer disposable income hence, could pay more for goods and services and the increase in prices paid the government.
References
Bureau of Economic Analysis (2016) GDP and the Economy Second Estimates for the Second Quarter of 2016 Retrieved from http://www.bea.gov/scb/pdf/2016/09%20September/0916_gdp_and_the_economy.pdf
Callen, T (2012) . Gross Domestic Product: An Economy’s all. Retrieved from http://www.imf.org/external/pubs/ft/fandd/basics/gdp.htm
