Question

If in some country personal consumption expenditures in a specific year are \(50 billion, purchases of stocks and bonds are \)30 billion, net exports are −\(10 billion, government purchases are \)20 billion, sales of secondhand items are \(8 billion, and gross investment is \)25 billion, what is the country’s GDP for the year?

Short answer

The country’s GDP is $85 billion.

Step-by-step solution

Concept of GDP

GDP is measured through aggregate demand components. It comprises gross investment, government purchases, national private consumption, and net exports.

Secondhand transactions or intermediate goods are never part of an economy’s GDP as they raise the problem of double counting.

Also, any transaction that does not enhance the economy’s production is not a measure of aggregate demand. Therefore, non productive transactions also do not add to the economy’s GDP.

Here, the purchase of bonds and stocks and sales of second hand items are non productive activities. Therefore, GDP does not include these.

Calculating GDP

GDP = Personal Consumption Expenditure + Net Exports + Government Purchases + Gross Investment

GDP = (50 – 10 + 20 + 25) billion USD

GDP = 85 billion USD

Therefore, the country’s GDP for the year is 85 billion USD.