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Hello, I'm wondering if you can clear up some confusion I have about an economies GDP.  Much, but not all of this comes from an online debate Ive been having with an individual, and an experts opinion on such things will greatly help resolve things.  Please feel free to answer as much or as little as you want in whatever manner you think is best.  Thank you.

Given the various functions for calculating GDP, is it right to say that X% of GDP is based on government spending, or Y% of GDP is based on profits, or that Z% is based on net exports?  Ive seen numerous individuals say X% of the economy is based on a given component, or that a components share is Y% of GDP.  But Ive been told that saying X% of GDP is based on some component is completely wrong.

Ive seen the expenditure approach,

Y (GDP) = C (consumer spending) + G (government spending) + I (investment) + N (net exports)

, written as C = Y G I N.  Given at the time of calculation the four known values (C, G, I, N), then Y is the only unknown and thus youre just solving for Y again.  Is there any real world use for writing a component of the function as a function of GDP and the other components?



Is it correct to say the following things about GDP?

That the expenditure approach explains how GDP is distributed not created.

That 70% of GDP is consumed by consumer spending.

That consumption is not part of GDP and just used in the expenditure approach to estimate GDP.

That the ability to produce is what drives GDP, not other factors.

If it was demand that was the driver, and demand international is the same, would we not all have about the same GDP?

With regard to the expenditure approach, if you increase parts on the right, then other parts on the right will lower because the GDP is as set as any of those other numbers.

GDP is a measure of a country's production.  That exists in reality without any formula.  The right side of the function is how what is made is distributed.  The reason the formula works is because all that is made, has to be distributed in one way or another.  That is why it equals.

It is 70% of the GDP is created by consumer spending, when in reality we consume 70% of the GDP.  The formula works backwards to see where the products went so you know what was produced. It is a balance sheet where GDP is the assets and (C + I + G + (X - M)) are the liabilities.  One side what is made, the other where it went.  The expenditure method is the national balance sheet.  The income method is an income statement showing where all of the country's money was made.

GDP is not a function of C + I + G + (X - M) but a balanced value.

The expenditure approach is a tool to estimate GDP, not the actual GDP.

Everything in economics is an estimate.  There are too many points to look at to consider it an exact science.

Answer
Thank you for your query. Economics is a science of assumptions and modelling.



Y (GDP) = C (consumer spending) + G (government spending) + I (investment) + N (net exports)

, written as C = Y G I N.  Given at the time of calculation the four known values (C, G, I, N), then Y is the only unknown and thus youre just solving for Y again.  Is there any real world use for writing a component of the function as a function of GDP and the other components?

This is an accounting equation.  Y = C + I + G + (X-M) = GDP

Is it correct to say the following things about GDP?

That the expenditure approach explains how GDP is distributed not created.  YES

That 70% of GDP is consumed by consumer spending. Indeed if C/Y equals 70p, if you divide both sides of an equation by the same Y, then 1=C/Y+I/Y+G/Y, giving you percentages, when you multiply both sides by 100


That consumption is not part of GDP and just used in the expenditure approach to estimate GDP. GDP is the sum of goods and services produces.  C Is a one of the components of the equation snd shows how it is distributed.

That the ability to produce is what drives GDP, not other factors. I do not understand what you mean, there is a production possibilities frontier for the economy. Factors of production drive the production function.

If it was demand that was the driver, and demand international is the same, would we not all have about the same GDP? Do not mix domestic and international. GDP is a measure of what is produced within the frontiers at a given time. you are mixing different concepts. Aggregate Demand equals Y in the simple Keynesian model, if that is what you mean.

With regard to the expenditure approach, if you increase parts on the right, then other parts on the right will lower because the GDP is as set as any of those other numbers. Is an equation, double entry system. a change on one side will be reflected on the other. Is a double entry accounting system.


GDP is a measure of a country's production.  That exists in reality without any formula.  The right side of the function is how what is made is distributed.  The reason the formula works is because all that is made, has to be distributed in one way or another.  That is why it equals.: it does, the gdp measures the goods and services produced within the borders of a given country/county/province/region. You need to understand the concept of Aggregate Demand in an economy.

It is 70% of the GDP is created by consumer spending, when in reality we consume 70% of the GDP.  No, if 70p is Consumption, it means that the propensity to consume in the economy is 70P

The formula works backwards to see where the products went so you know what was produced. Not really, it only helps you figure out the distribution of the goods and services produced


GDP is not a function of C + I + G + (X - M) but a balanced value. Is an equation and that is why the item Errors and Omissions exists in the national accounting system. some production may not be recorded due to the existence of underground economy. that is why there is a discrepancy with the actual GDP


There are no such things as exact amounts.  it is indeed an estimate.

Everything in economics is an estimate.  There are too many points to look at to consider it an exact science.
correct, why would you want it to be an exact science? economics is based on human behaviour and human decisions.

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