Question

$$\begin{array}{lr} \text { Item } & \text { Billions of dollars } \\ \hline \text { Wages } & 8,000 \\ \text { Consumption expenditure } & 10,000 \\ \text { Other factor incomes } & 3,400 \\ \text { Investment } & 1,500 \\ \text { Government expenditure } & 2,900 \\ \text { Net exports } & -340 \end{array}$$ Calculate U.S. GDP in 2009

Short answer

U.S. GDP in 2009 is $14,060 billion.

Step-by-step solution

Understand GDP Calculation

Gross Domestic Product (GDP) is the total value of all goods and services produced within a country in a specific time period. It can be calculated using the expenditure approach, which sums up consumption, investment, government spending, and net exports.

Identify the Components

From the given data, identify the values that will be used in the GDP calculation: - Consumption expenditure (C): \(10,000 billion - Investment (I): \)1,500 billion- Government expenditure (G): \(2,900 billion- Net exports (NX): -\)340 billion

Use the Expenditure Approach Formula

The expenditure approach formula for GDP is: \[ GDP = C + I + G + NX \] where C = Consumption expenditureI = InvestmentG = Government expenditureNX = Net exports

Substitute the Values

Substitute the identified values into the GDP formula: \[ GDP = 10,000 + 1,500 + 2,900 + (-340) \]

Calculate the GDP

Perform the arithmetic operation: \[ GDP = 10,000 + 1,500 + 2,900 - 340 = 14,060 \]

Key concepts

Expenditure approach

The expenditure approach is one of the most common methods for calculating a country's Gross Domestic Product (GDP). It measures the total amount spent on all final goods and services during a given period. The main idea is to sum up all expenditures made in the economy.

This method includes several key components:

• Consumption Expenditure (C): The total spending by households on goods and services.
• Investment (I): The spending on business capital, residential capital, and inventories.
• Government Expenditure (G): The total government spending on goods and services.
• Net Exports (NX): The total exports minus total imports.

Once these components are identified, the GDP can be calculated using the formula:
\[ GDP = C + I + G + NX \]
The expenditure approach provides a comprehensive snapshot of economic activity by showing how much different sectors of the economy are spending.

Net exports

Net exports (NX) play a crucial role in GDP calculations and can often be a source of confusion. Net exports represent the difference between a country's total exports and total imports:
\[ NX = \text{Exports} - \text{Imports} \]
Exports are goods and services produced domestically and sold to other countries. Imports, on the other hand, are goods and services produced abroad and bought by the domestic market.

When the value of a country's exports exceeds its imports, net exports are positive. Conversely, when imports exceed exports, net exports are negative.

In the given exercise, the net exports value was provided as -340 billion dollars. This indicates that the U.S. imported more goods and services than it exported in 2009. Net exports are included in the GDP calculation because they provide insight into a country's international trade balance and economic health.

Government expenditure

Government expenditure (G) is a vital component of the expenditure approach for calculating GDP. It includes all government spending on final goods and services. This can range from spending on public services such as education and healthcare to investments in infrastructure like roads and bridges.

Government expenditure is different from other forms of government outlays, such as transfer payments (e.g., pensions, unemployment benefits), because these do not directly correspond to the production of goods and services. Therefore, transfer payments are not included in the GDP calculation.

In the example given, the government expenditure was 2,900 billion dollars for the year 2009. This figure is directly added to the consumption expenditure, investment, and net exports to determine the total GDP using the expenditure approach formula. The significant portion of GDP that government spending can represent showcases the government's influence on overall economic activity and infrastructure development initiatives.