Question

Suppose that this year a small country has a GDP of \(100 billion. Also assume that Ig = \)30 billion, C = \(60 billion, and Xn = − \)10 billion. What is the value of G?

a. \(0

b. \)10 billion

c. \(20 billion

d. \)30 billion

Short answer

Option C, $20 billion.

Step-by-step solution

Expenditure method for calculating GDP

The expenditure method adds the total amount of money spent or expenditure on finished goods and services stock of capital in a year to find the GDP of the country.

$GDP=C+I_g+G+X_n$

C is the personal consumption expenses of the households to buy the market goods and services

I_gis the gross investment expenses of the firms on capital goods.

G is the government purchases

X_n is the net exports, a difference between foreign spending on domestically produced goods (exports) and domestic spending on foreign goods (imports).

Explanation for choosing option ‘c’

Given, C is $60 billion, I_g is $30 billion, X_n is -$10 billion, and GDP is $100 billion.

$$\begin{gathered} GDP=C+I_g+G+X_n \\ 100,000,000,000=60,000,000,000+30,000,000,000+G+\left(-10,000,000,000\right) \\ G=100,000,000,000-80,000,000,000 \\ G=20,000,000,000 \end{gathered}$$

Thus, government expenditure is $20 billion, and option ‘c’ is correct.