Question

Write out and explain the GDP and Aggregate Expenditure identity equations.

Answer 1

GDP - The monetary value of all goods and services produced within a nation's geographic borders over a particular period of time.

Aggregate expenditure - is the current value of all finished goods and services in the economy.It is total of all the expenditure undertaken in the economy.aggregate expenditure equal to total of household consumption(C) , Investment (I) ,government spending (G) and net exports.

Consumption means - What a household consume over a period of time.

Investment - Amouny of expenses towards the capital goods.

Government expenses- Amount spend by government ( federal ,State, local government)

We can say -

Aggregate expenditure(AE) - C +I + G+ NX

Aggregate expenditure determine how much firms and households spend on goods and service at each level of income.It is one of the method to determine total economic activities in an economy,also known as gross domestic product.

When

Supply > expenditure ( there is a reduction in either the prices or the quantity of the output .and due to this total output is reduced hence GDP falls.

Supply < expenditure (there is excess demand which leads to an increase in prices or output.hence GDP raises