- Identify the components of GDP: Consumption (\$2,000), Investment (\$1,000), Government Spending (\$1,000), Exports (\$600), and Imports (\$500).
- Apply the expenditure approach formula: \(\text{GDP} = C + I + G + (X - M)\).
- Substitute the values into the formula to obtain \(\text{GDP} = 2000 + 1000 + 1000 + (600 - 500)\).
- The calculated Gross Domestic Product is \(\boxed{\$4,100}\).
Explanation
- Understanding GDP Calculation via Expenditure Approach
The Gross Domestic Product (GDP) is a standard measure used to determine the market value of all final goods and services produced within a country in a given period. The expenditure approach is one of the most common methods for calculating GDP. It sums up all the spending components within the economy. The components are given as:
- Consumption (C): \(\$2,000\)
- Investment (I): \(\$1,000\)
- Government Spending (G): \(\$1,000\)
- Exports (X): \(\$600\)
- Imports (M): \(\$500\)
The formula for calculating GDP using the expenditure approach is:
\[\text{GDP} = C + I + G + (X - M)\]
Here, \((X - M)\) represents Net Exports, which is the value of exports minus the value of imports.
- Calculating the Gross Domestic Product
Using the formula \(\text{GDP} = C + I + G + (X - M)\), we substitute the given values:
- \(C = \$2,000\)
- \(I = \$1,000\)
- \(G = \$1,000\)
- \(X = \$600\)
- \(M = \$500\)
Substituting these values:
\[\text{GDP} = \$2,000 + \$1,000 + \$1,000 + (\$600 - \$500)\]
First, calculate the Net Exports:
\[\text{Net Exports} = \$600 - \$500 = \$100\]
Now, sum all components to find the GDP:
\[\text{GDP} = \$2,000 + \$1,000 + \$1,000 + \$100 = \$4,100\]
Thus, the total market value of the country's production, or GDP, is \(\$4,100\).
Examples
In everyday life, economists and government policy makers use the GDP calculation to assess the health of an economy. For example, if a small island nation tracks its tourism spending (consumption), building of new hotels (investment), government-funded infrastructure projects (government spending), and the trade balance of selling fish abroad vs. importing technology, they can calculate their total economic output to see if the economy is growing or shrinking. Understanding this calculation provides a fundamental look at how national economic data is aggregated.