The slope of the investment function is zero, indicating no relationship between GDP and investment. However, changes in factors like technological opportunities, expectations about near-term economic growth, and interest rates would all cause the investment function to shift up or down. If imports exceed exports, as in recent years, then a trade deficit exists. Based on these four components of demand, GDP can be measured as: GDP = Consumption + Investment + Government Spending + Net Exports. If exports exceed imports, as in most of the 1960s and 1970s in the U.S. economy, a trade surplus exists. In its most basic form, the graph of aggregate expenditures looks like the graph shown in Figure 5. These questions allow you to get as much practice as you need, as you can click the link at the top of the first question (“Try another version of these questions”) to get a new set of questions. Imports are drawn in the Keynesian cross diagram as a downward-sloping line. GDP is the country's total economic output for each year.It's equivalent to what is being spent in that economy. The pie chart gives a nice visual of the components of GDP, but keep in mind that since the net export expenditure share is negative, the size of the pie is only approximately correct. Exports are added to total demand for goods and services, while imports are subtracted from total demand. Figure 2. Consumption expenditure, that is, spending by households and individuals, is about two-thirds of GDP, but it moves relatively little over time. Investment expenditure and government spending on goods and services are each about the same order of magnitude, 15-20% of GDP. Figure 1 shows an investment function where the level of investment is, for the sake of concreteness, set at the specific level of 500.

In this example, the marginal propensity to import is 0.1, so imports are calculated by multiplying the level of income by –0.1. Figure 4.

GDP can also be measured by examining what is produced, instead of what is demanded. SURVEY .

Consumer Expenditure (from the expenditure approach you read about above) consists of spending on durable goods, nondurable goods, and services. government expenditure on goods and services, Source: http://bea.gov/ Table 1.1.5 Gross Domestic Product, GDP can also be measured by examining what is, Source: http://bea.gov Table 1.2.5 GDP by Major Type of Product, Everything a firm produces, when sold, becomes revenues to the firm. Understanding how to measure GDP is important for analyzing connections in the macro economy and for thinking about macroeconomic policy tools.



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