Question

Problem 7. Use the amounts in the national accounts listed in the table below Accounts Billions of Dollars 1,500 295 1200 10 475 13,320 5,975 3,150 3,400 3,575 850 2,200 roprietors' income onsumption of fixed capital (depreciation) ederal government purchases of goods and services Compensation of employees Personal consumption expenditures 6 iscellaneous adjustments orporate profits ports ross private domestic investmert Rental income State and local government purchases of goods and ervices et interest tatistical discrepancy 475 3,375 mports a. Calculate GDP with the expenditure approach by writing a list of the names of the b. Similarly, calculate GDP with the income approach c. Carefully explain why part (a) is equal to part (b). accounts and the amounts from the table above. Then write the total amount

Answer 1

Answer:

GDP with the expenditure approach includes consumption expenditure, gross private domestic investment, government spending on goods and services and the net exports which is the difference between export and import of the country.

GDP with expenditure approach = personal consumption expenditure + gross private domestic investment + government spending (federal government purchases of goods and services + state and local government purchases of goods and services ) + net exports (export - import)

   Personal consumption expenditure=13,320

Gross private domestic investment= 3,575

Government spending (federal government purchases of goods and services + state and local government purchases of goods and services) = 1,200 + 2,200 = 3,400

Net exports (export - import) = 3,400 – 3,375 =25

GDP = 13,320 + 3,575 + 3400 + 25

GDP = $20,320

GDP with the income approach includes compensation of employees, net interest, rental income, proprietor’s income, corporate profit and miscellaneous adjustments (depreciation, indirect tax etc.)

  Compensation of employees= 10,475

Net interest = 475

Rental income = 850

Proprietor’s income = 1,500

Corporate profit = 3,150

Miscellaneous adjustment = 5975

GDP with income approach = 22,425

Statistical discrepancy is the difference between GDP with income approach and GDP with expenditure approach

Statistical discrepancy = GDP with income approach – GDP with expenditure approach

                                        = 22,425 - 20320

   Statistical discrepancy = 2,105

Statistical discrepancy is removed which makes GDP from both methods equal

The GDP through both methods is equal because how much we earn goes to the expenditure in the economy