Question

In an economy where GDP equals 100, consumption equals 67, investment equals 14, and government purchases equal 21,

     a)    exports must exceed imports by 2.

     b)    taxes must exceed government purchases by 2.

     c)    imports must exceed exports by 2.

     d)    net exports must equal 2.

     e)    none of the above.

Answer 1

The correct answer is 'Option C'.

The GDP is equal to the sum of consumption expenditure (C), investment expenditure (I) and government spending (G).

The sum of C, I and G is 67 + 14 + 21 = 102. But, the value of GDP is given as 100. So, the net exports must be negative. The net exports is the amount by which the exports exceed imports. For net exports to be negative, the value of imports must exceed the value of exports. Therefore, the correct answer is 'Option C'.