1. All incomes received in producing the value of the nation's output are equivalent to the total spending made on the final goods and services. True or False. Discuss and illustrate your answers with examples.
2. Of the four components of GDP, which one do you believe is the largest and why?
3. Discuss why GDP is a measure of a country's standard of living but not the best.
Gross Domestic Product:
It is the value of goods and services produced in an economy within a given period of time and within the domestic territory of a nation. The four components of GDP are consumption, investment, government spending and net exports.
Answer and Explanation:
This statement is true. Income earned by one person is spent by another person. Let us assume, if only two person are there in the economy, then what one person earns, is actually spent by the another person.
So, Income of one person = Expenditure by another person.
Largest component is the consumption because it includes the multiplier effect. Government applies fiscal policies to encourage the demand. Thus, it encourages the government sending. The spending, increases the consumption to the many fold.
GDP is an aggregate measure so it talks about the overall increase and decrease in the productivity, income and other macroeconomic indicators. But, it does not talk about the disparity of income. It also does not talk about the economic divide being spread in the economy. So, GDP does not explain the exact standard of leaving at the ground level.
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from CLEP Social Sciences and History: Study Guide & Test PrepChapter 59 / Lesson 2