Suppose a country produces final goods and services with a market value of $100

Question

Suppose a country produces final goods and services with a market value of $100 billion in 2012, but only $90 billion worth of goods and services is sold to domestic and foreign buyers. What is this country's GDP? Explain your answer State the formula for GDP. Explain how net exports affect an economy. Calculate a country's current account balance if country's total income accruing to its residents is $150 billion, consumption is $120 billion and country's total spending on capital goods by private sector and government is $30 billion. Suppose a country nominal GDP increases from $100 billion in 2012 to $120 billion in 2013. The GDP implicit price deflator was 100 in 2012 and 100.1 in 2013. Calculate the country's economic growth.

Explanation / Answer

1.

Calculation of GDP under the production approach

GDP = gross value of output – value of intermediate consumption.

Value of output = value of the total sales of goods and services plus value of changes in the inventories.

Given:

Market value = $100 million

Sold to domestic and foreign buyers = $90 billion

Hence GDP = $100 – $90 = $10 billion.

2.

Balance in the current account is calculated by adding goods, services, income and current transfers.

Goods are traded by countries all over the world. When a transaction takes place from a local country to a foreign country, it is called an export.

Consider the other way around. When goods are bought from a foreigner, it is an import.

While calculating current account, exports are marked as credit as there is inflow of money and imports are marked as debit as there is outflow of money.

CA = (X-M) + NY + NCT
Here,

CA is current account,
X export
M import
NY net income from abroad
NCT net current transfers.

Another formula is Spending – investment.

Investment = $150 - $120 = $30 billion

Thus, CA = $30 -$30 = 0

3.

Economic growth = GDP2 – GDP1 ÷ GDP1

Economic growth = 120 – 100 ÷ 100 = 20 ÷ 100 = 0.2

GDP deflator = Nominal GDP ÷ Real GDP × 100

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