Uncertain outlook The Commerce Department reported that in D

Uncertain outlook The Commerce Department reported that in December 2015, retail sales rose by 0.2, net exports decreased, inventories held by businesses rose by 0.1 percent, and total sales by businesses fell by 0.6 percent. Source: Commerce Department, February 201 7. Which component of GDP changed because retail sales increased? Which component of GDP changed because business inventories increased? 8. Explain the effect of the fall in net exports on GDP. 9. Does the statement that total sales by businesses fell by 0.6 percent mean that GDP decreased by 0.6 percent? Explain your answer.

Solution

7) There are four components of GDP, consumption expenditure, investment expenditure, government expenditure and net exports. Given that business has experienced an increase in inventories and a reduction in total sales by business. Retail sales have increased

Consumers buy goods at retail market and so consumption expenditure must have increased because retail sales have increased. Then, government must have purchased fewer goods and services from businesses so that there was an increase in inventories and a reduction in total sales by business

8) Net exports are added in GDP. Smaller size of net exports/ reduction in net exports will result in a reduction in GDP

9) No. GDP is affected by changes in any, few, or all four factors that are its constituents. A measurable change in one factor can change the GDP directly but here GDP is influenced by changes in consumption expenditure, investment expenditure as well as net exports. So GDP is more or less changed by 0.6 %.