Question

as you can see, GDP and consumption lines lie practically on top of each other from 1929 through early 1960s before diverging. Write a short paragraph explaining why GDP (a measure of output) exceeded consumption starting 1960s. What happened to the economy in early 60s that brought about divergence of output and consumption?

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Answer 1

The formula to calculate GDP is:

GDP = personal consumption + gross investment + government investment + government spending + (exports – imports)

So, the GDP exceeded consumption in starting 1960s because any of personal consumption, gross investment, government investment, government spending, or (exports-imports) increased or it would be better if the way that their combination was increased in starting 1960s. The divergence happened because the personal consumption was low in the early 60s as compared to the gross investment, government investment, government spending, and (exports-imports).