Principles of Macroeconomics / Unit 3 MAC 0207 worked example, 60 to 90 seconds
Computing GDP from Components
The idea
To compute GDP by expenditure, sort every figure you are given into one of four bins, then add. Consumption is household spending. Investment is newly produced capital, including the change in inventories. Government purchases are government spending on goods and services, never transfers. Net exports are exports minus imports. Add consumption, investment and government purchases, then add exports and subtract imports. Anything that does not belong in one of the four bins is left out entirely rather than placed in the nearest one.
In practice
Worked example: consumption four hundred, business equipment fifty, new housing twenty, inventories up ten, government purchases one hundred and twenty, exports one hundred, imports one hundred and twenty, and pension payments of sixty. Investment is fifty plus twenty plus ten, which is eighty. The pensions are transfers and are left out. So GDP is four hundred plus eighty plus one hundred and twenty plus one hundred minus one hundred and twenty, which is five hundred and eighty.
Where people slip
Two traps sit in these questions. Transfer payments are put in front of you precisely to see whether you add them, and they never belong. And inventories are part of investment even when they rose because goods went unsold, since they were produced this year.
Your place on the trail
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Builds on
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