Question 3 10 marks a What are the components of the expendi

Question 3 (10 marks) (a) What are the components of the expenditure approach to calculating GDP? What is the proportion of the largest component in GDP? (5 marks) (b) A farmer sells sheep to a processor for $2,000,000. The processor sells meat to the supermarkets for $3,000,000. The supermarkets sell meat to customers for $4,000,000. What is the contribution to GDP from the processor? (2 marks) (c) What does it mean when economists say that the economy is at full employment? (3 marks)

Solution

Question 3

(a)

Following are the components of the expenditure method of calculating GDP -

1. Consumption spending - This relates to spending by households on durable and non-durable goods as well as on services.

2. Government purchases

3 Investment - This relates to spending by businesses on plant & equipments, bulidings, offices etc. as well as spending by households on new residential spaces.

4. Net exports - This is the difference between exports and imports of the country.

The largest component of GDP is consumer spending.

The proportion of consumer spending in GDP is around 70 percent.

(b)

Calculate the contribution to GDP from the processor -

Processor sells meat to the supermarkets for $3,000,000 and purchases sheep from farmers for $2,000,000.

Contribution to GDP = Total sales - Total purchases = $3,000,000 - $2,000,000 = $1,000,000

The contribution to GDP from the processor is $1,000,000.

(c)

When economists say that the economy is at full employment then this means that unemployment rate in economy is equal to the natural rate of unemployment and cyclical unemployment in economy is zero or there is no cyclical unemployment in the economy.