Question

Suppose GDP is 16 trillion dollars , with 10 trillion dollars coming from consumption, 2 trillion dollars coming from gross investment, 3.5 trillion dollars coming from government expenditures, and 500 billion dollars coming from net exports. Also suppose that across the whole economy, depreciation (consumption of fixed capital) totals 1 trillion dollars . From these figures, we see that net domestic product equals: a. $$ 17.0\( trillion. b. $$ 16.0\) trillion. c. $$ 15.5$ trillion. d. None of the above.

Short answer

NDP is 15 trillion dollars, so the correct answer is d. None of the above.

Step-by-step solution

Understand Net Domestic Product (NDP)

Net Domestic Product (NDP) is calculated by subtracting the depreciation (consumption of fixed capital) from the Gross Domestic Product (GDP). It represents the total value of goods and services produced in a country, minus the loss in value of capital goods due to wear and tear.

Identify Given Values

From the exercise, we know the GDP is 16 trillion dollars, and the depreciation is 1 trillion dollars.

Calculate NDP

The formula for Net Domestic Product is given by \( NDP = GDP - Depreciation \). Substituting the given values, we have:\[ NDP = 16 \text{ trillion} - 1 \text{ trillion} = 15 \text{ trillion dollars} \]

Choose the Correct Answer

Looking at the options, 15 trillion dollars does not match any of the provided choices. Therefore, the correct answer is: d. None of the above.

Key concepts

Gross Domestic Product

Gross Domestic Product, often abbreviated as GDP, is a fundamental measure in economics that represents the total value of all goods and services produced over a specific time period within a country. It acts as a comprehensive scorecard of a country's economic health.

The calculation of GDP can include various components:

• Consumption: This includes all private expenditures by households and institutions, which, in the given example, accounts for 10 trillion dollars.
• Investment: This indicates the money spent on goods and services that will be used for future production, like factories and machinery. Here, it stands at 2 trillion dollars for gross investment.
• Government Spending: This encompasses all government expenditures on goods and services. For our exercise, this is 3.5 trillion dollars.
• Net Exports: This is calculated as exports minus imports. In the example, net exports are positive at 500 billion dollars.

Understanding these components helps in understanding the economic activity of a nation.

Depreciation

Depreciation in economic terms refers to the reduction in the value of capital goods over time due to factors like wear and tear and obsolescence. It's also known as the consumption of fixed capital, and it's important for economic calculations.

In our exercise, depreciation is given as 1 trillion dollars. This means that out of the total value of produced goods and services, equivalent to 1 trillion dollars is "consumed" to compensate for the wearing down of capital goods. By subtracting depreciation from GDP, we can determine Net Domestic Product (NDP), which provides a clearer image of sustainable economic production without depleting the nation's resources.

Economic Calculation

Economic Calculation involves a series of steps to determine key economic indicators, which are crucial for understanding the economic state and making informed decisions.

In the context of the exercise, economic calculation begins with identifying given values such as GDP and depreciation. Next, the Net Domestic Product (NDP) is calculated using the formula:

• \( NDP = GDP - Depreciation \)
• In this case: \( NDP = 16 \text{ trillion} - 1 \text{ trillion} = 15 \text{ trillion dollars} \)

Such calculations enable governments and economic analysts to assess the actual productive capacity and make necessary adjustments to policies and strategies.

National Accounts

National Accounts are a systematic framework used by countries to measure their economic activity. They provide a detailed economic dataset that is crucial for understanding the structure and performance of an economy.

The core of national accounts is constructed around GDP, which is used to create further indicators like Net Domestic Product. These accounts are invaluable for:

• Providing data for economic analysis and policymaking.
• Tracking economic growth over time.
• Comparing economic performance between different countries.

Through national accounts, governments and analysts can evaluate economic health, guide policy advisement, and ground discussions about investments and savings in measurable terms.