Question

5. Define Gross Domestic Product.

6. Write the Expenditure Approach Formula.

7. In general, what is the largest component of the Expenditure Formula?

8. Define Nominal GDP and Real GDP. Explain why Real GDP is a better measure to make comparisons.

Answer 1

Ans:

5) Gross domestic product (GDP) is the market value of all the finished goods and services produced in a country during a specific period.

6) GDP = C + I + G + (X − M)

where, C = personal consumption expenditure , I = Gross private investment, G = Government expenditure, (X − M) = Exports minus Imports.

7) Personal consumption expenditure is the largest component under expenditure approach to GDP.

8) Nominal GDP is GDP at current market prices.Nominal GDP is GDP without the inflation adjustment.

Real GDP is nominal GDP adjusted for the effects of inflation.

The main difference between nominal GDP and real GDP is that nominal values are not adjusted for inflation but real values are adjusted for inflation.since real GDP is adjusted for inflation it has greater accuracy and better perspective than nominal GDP.Hence real GDP is a better measure.