Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 7: Problem 13

Does the expenditure approach to computing GDP measure U.S. spending on all goods, U.S. spending on only U.S. goods, or U.S. and foreign spending on only U.S. goods? Explain your answer.

Short Answer

Expert verified
The expenditure approach to calculating GDP measures 'U.S. and foreign spending on only U.S. goods'. It does not include U.S. spending on foreign goods.

Step by step solution

01

Understanding the Expenditure Approach

The expenditure approach to GDP calculates the total amount spent by different groups that participate in the economy. These include households, businesses, government, and foreigners. The formula is \( GDP = Consumption + Investment + Government spending + (Exports - Imports) \) . Consumption (C) includes all private consumption, or consumer spending, in a nation's economy. Investment (I) includes business capital, 'inventory' investment and residential investment. Government Spending (G) includes spending by all levels of government on finalized goods and services. Net Exports (X - M) is the total exports minus total imports.
02

Identify the Mode of Spending on Goods

In this method, the expenditure approach measures 'U.S. and foreign spending on only U.S. goods'. This is seen from the formula where consumption by households covers spending on domestic goods, and net exports (Exports - Imports) cater for foreign spending on U.S. goods. However, spending on foreign goods by U.S. entities (imports) is subtracted, as it is not a part of the domestic production.
03

Explain the Answer

From the analysis, it is visible that the expenditure approach to calculating GDP involves the computation of spending on domestic goods and services, both by U.S. entities and foreigners. However, it subtracts the amount spent on foreign goods (imports). This emphasizes that the GDP measured using this approach relates only to the domestic production within the U.S.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Discuss the problems you see in comparing the GDPs of two countries, say, the United States and the People's Republic of China.

The manuscript for this book was keyed by the author. Had he hired someone to do the keying, GDP would have been higher than it was. What other activities would increase GDP if they were done differently? What activities would decrease GDP if they were done differently?

Which of the following are included in the calculation of this year's GDP? (a) 12 -year-old Johnny mowing his family's lawn; (b) Dave Malone buying a used car; (c) Barbara Wilson buying a bond issued by General Motors; (d) Ed Ferguson's receipt of a Social Security payment; and (e) the illegal drug transaction at the corner of \(\mathrm{Elm}\) and Fifth.

What is the capital consumption allowance?

Economists prefer to compare Real GDP figures for different years instead of comparing GDP figures. Why?
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free