Question

1. Define business inventories and explain how they are counted in GDP.

2. Calculate government spending given the following information:
GDP = $300 million

Consumer spending = $100 million
Financial investment spending = $35 million
Investment spending = $60 million
Exports = $20 million

Imports=$5 million

3. Calculate consumer spending given the following information:
GDP = $110 million
Government spending = $38 million
Financial investment spending = $12 million
Investment spending = $18 million
Net exports = $2 million

Show your work on all questions.

Answer 1

1) Business inventory is the property of the business which they hold in the form of stock for their business. Inventory includes raw material, finished goods , goods under production etc.

These business inventory which are incouinc in GDP under consumer spending and investment as this the goods which are consumed by people and invested by the people.

In GDP financial investment spending is not included as financial investment is considered as savings

Y = C + I + G + NX

Y = GDP

I = Investment spending

C = consumer spending

G = Government spending

NX = Exports - Imports

2) Y = C + I + G + NX

300 = 100+60+G + (20-5)

G = 300-175 = 125 million

3) Y = C + I + G + NX

110 = C + 18+38+2

C = 110-58 = 52 million