GDP (Gross Domestic Product)
Financial Times, Friday 29. January: The US economy barely grew in the final three months of 2015 as a strong dollar, sapped exports, manufacturing sputtered and consumer spending cooled. Expansion in the world's most important economy slowed to 0.7 per cent year on year in the fourth quarter, sharply down from 2 per cent in the previous period. For 2015, the economy expanded 2.4 per cent, matching the pace from 2014.
Exports declined by 2.5 per cent as the rise in the dollar made US goods more expensive and the global fall in oil investment eroded demand for drilling-related equipment. Consumer spending, which makes up about two-thirds of gross domestic product and has been a bright spot for the US economy, rose 2.2 per cent, marking a slowdown from the 3 per cent pace logged in the third quarter. Meanwhile, investment fell 2.5 per cent as energy companies pared back spending in light of the rout in the price of crude oil. The latest numbers confirm that the biggest challenges facing the US expansion are coming from abroad- in particular from slowing overseas growth, the rising dollar, falling commodity prices and volatile financial markets.
a.) Define Gross Domestic Product (GDP).
is the monetary value of all the finished goods and services produced within a country's borders in a specific time period.
b.) According to the above news article by how much did the US economy grew in:
i. the third quarter of 2015
ii. the fourth quarter of 2015
iii. the whole year 2015
c.) Write down the GDP equation that splits output by its expenditure components.
d.) List the components of the GDP equation from c.), that the news article is talking about.
e.) By how much did each of the components from d.) increase or decrease?
f.) Explain the differences between real and nominal GDP.
The US Economic Performance in 2015:
When analyzing the performance of any economy, we can check the evolution of the different components of the GDP in order to understand which are main drivers of economic growth.
Answer and Explanation:
a) Gross Domestic Product (GDP): is basically defined as the monetary value of all goods and services produced in a certain economy during a certain period of time, typically one year.
b) The American economy grew by:
i) 2% in the third quarter of 2015.
ii) 0.7% in the fourth quarter of 2015,
iii) 2.4 during the year 2015.
c) The GDP equation is the following:
Y = C + I + G + X - M
d) In the previous equation, C is consumption, G is public spending, I is investment, X are exports and M imports.
E) The article refers to C, which grew by 2.2%, X which fell by 2.5% and I, which also fell by 2.5%.
f) The main difference is that nominal GDP is the total amount of goods and services produced in a certain country and a certain year using market values and without making any adjustment for inflation. Real GDP uses for its calculations market prices in a certain base year and, in consequence, corrects the calculations for inflation. The lesson is mapped to an interesting video on this topic.
Learn more about this topic:
from Economics 102: MacroeconomicsChapter 5 / Lesson 5