Calculate the GDP of Dinoland using the expenditures approach given the following data: personal consumption expenditures = $10 billion; gross private domestic investment = $5 billion; government spending = $3 billion; exports = $2 billion, imports = $1 billion.
a) $12 billion
b) $19 billion
c) $18 billion
d) $17 billion
The Correct Answer and Explanation is :
To calculate the GDP of Dinoland using the expenditures approach, we will use the following formula:
[
\text{GDP} = C + I + G + (X – M)
]
Where:
- ( C ) = Personal Consumption Expenditures
- ( I ) = Gross Private Domestic Investment
- ( G ) = Government Spending
- ( X ) = Exports
- ( M ) = Imports
Given the data:
- ( C = 10 ) billion
- ( I = 5 ) billion
- ( G = 3 ) billion
- ( X = 2 ) billion
- ( M = 1 ) billion
We can plug these values into the formula:
- Calculate net exports (exports minus imports):
[
X – M = 2 – 1 = 1 \text{ billion}
] - Now substitute all values into the GDP formula:
[
\text{GDP} = C + I + G + (X – M)
]
[
\text{GDP} = 10 + 5 + 3 + 1
]
[
\text{GDP} = 19 \text{ billion}
]
Thus, the GDP of Dinoland is $19 billion (option b).
Explanation
The expenditures approach to calculating GDP focuses on the total amount spent on the economy’s final goods and services within a given period. This method provides a comprehensive overview of economic activity, accounting for all components of spending.
- Personal Consumption Expenditures (C): This is the largest component of GDP, representing all private expenditures by households and non-profit institutions. In this case, Dinoland’s residents spent $10 billion on goods and services.
- Gross Private Domestic Investment (I): This includes business investments in equipment and structures, as well as residential construction. With $5 billion invested, it reflects the economy’s growth potential.
- Government Spending (G): Government expenditures on goods and services contribute to GDP as well. In Dinoland, government spending was $3 billion, reflecting public sector activity.
- Net Exports (X – M): This component captures the balance of trade. Exports increase GDP, while imports decrease it. Here, Dinoland had net exports of $1 billion, resulting from $2 billion in exports and $1 billion in imports.
Summing these components provides the total GDP of $19 billion, illustrating the overall economic health and activity in Dinoland. This calculation is crucial for policymakers and economists to assess the economy’s performance and make informed decisions.