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Chapter 11: Problem 2

Why is import spending subtracted from the sum of consumption, investment, government purchases, and export spending in computing GDP?

Short Answer

Expert verified
Import spending is subtracted from the GDP calculation because GDP measures the value of goods and services produced within a country in a certain period. Including imports, which are goods and services produced outside the country, would distort the measurement of domestic production. Therefore, they are subtracted to assess the actual economic performance of the nation.

Step by step solution

01

Understanding GDP

GDP represents the total output or production of an economy. It includes all goods and services produced within a country's borders in a specific timeframe.
02

Breaking down the GDP formula

The GDP formula stands as follows: GDP = Consumption + Investment + Government Spending + (Exports - Imports). These components represent all levels of spending within an economy.
03

Reason for Subtracting Imports

Imports are subtracted because those are goods and services that are produced in another country but have been purchased by residents of the home country. Including these in the GDP calculation would mean taking into account production that took place outside the country's borders, hence they are subtracted.

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Most popular questions from this chapter

Define: a. gross domestic prod\(\operatorname{uct}(\mathrm{GDP})\) b. double counting

Suppose consumption is \(\$ 2,000\) billion, investment is \(\$ 700\) billion, government purchases are \(\$ 1,200\) billion, export spending is \(\$ 100\) billion, and import spending is \(\$ 150\) billion. What does GDP equal?

Why are only final goods and services computed in GDP?

The noninstitutional adult civilian population is 120 million, the number of unemployed persons is 5 million, and the number of employed persons is 60 million. What is the unemployment rate?

Can GDP go up at the same time that real GDP goes down? Explain your answer.
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