Joanne L.

Phillip

Option C

Section C

1. Explain what double counting is and discuss why GDP is not equal to total sales. Double counting is the act of including the value of intermediate goods more than once in the value of GDP. Because the value, or price, of final goods includes the cost, or value, of all intermediate goods used, including market transactions for intermediate separately in the measurement of GDP would lead to double counting. GDP only adds up the value added by each firm, which is the value of the products that it sells minus the value of materials it had to buy to create those products. Whereas, total sales is the total net value of all goods and services produced within a nation over a specified period of time. Adding up total sales would result in a lot of double counting.

2. Explain why imports are subtracted in the expenditure approach to calculating GDP. Since GDP is solely concerned with domestically produced goods and services, most economies do not have enough resources to produce these goods and services locally. This will result in imports which must be deducted to avoid counting foreign supply as domestic. Imported goods will be included in these terms in The Expenditure Approach: C= Domestic Consumption plus consumption of foreign commodities (CF). I = Domestic Investments plus Foreign investments (IF). G = Government expenditure on domestic commodities plus government spending on foreign commodities (GF). Therefore, CF+ IF+ GF = Imports

3. Evaluate the following statement: Even if the prices of a large number of goods and services in the economy increase dramatically, the real GDP for the economy can still fall. This is statement is true because the rise in prices (inflation) has a an effect on all the determinants of GDP. One reason being a rise in imports. When the prices of domestic goods rise, the demand for imports increases. One of the components of GDP is net exports. Net exports are equal to the total amount of exports in a given period, minus the total amount of imports in the same period. Thus, when imports rise, net exports fall. A fall in net exports in turn decreases nominal GDP and thus real GDP. Another reason is a rise in interest rates. When prices increase but the supply of money remains fixed, increased demand for money causes

interests rates to rise. When these rise, spending decreases, as the cost of money is greater. Therefore, consumer expenditure, one of the largest components of GDP falls. Governmental expenditure falls in a similar manner. Investment also falls, as the rate of borrowing of finance falls as a result of more expensive loans.

4. Look at the list of countries provided and their economic indicators. Pick one of the countries from the list provided, find a recent article about the countrys economic situation and write a paragraph or two describing the events or economic conditions of that country. Explain why they are growing or not growing rapidly. Country chosen: India Indias GDP (the broadest measure of economic growth) came in at 4.4% annual rate for the June to July quarter. That's India's lowest quarterly growth since the beginning of 2009, heightening concerns about a nation that is struggling with a falling currency, dysfunctional politics and a highly volatile stock market. Other reasons why Indias economy is not growing are the non-provision of essential public services and illiteracy amongst the populace. Though India is the largest producer of generic medicine, its healthcare is lacking. All of these affect the productivity of Indias economy. High inflation and interest rates is another problem facing India. It affects corporate profits due to increased cost of production with is then passed down onto consumers.

Assignment 1 - GDP - ECO103

Submitted: September 8, 2013