Question

Question 1 (b) List and briefly explain each components of Gross Domestic Product (GDP) based on expenditure approach (4 marks) Compute how much each of the following items is worth in terms of today's dollars using 177 as the Consumer price index for today. 1) In 1986, the CPI was 17.7 and the price of a movie ticket was $0.25 in that year, (2 marks) ii) In 1992, the CPI was 13.1 and a cook earned S15.00 a week in that year. (2 marks) In addition to investment in physical and human capital, state TWO (2) other public policies that a country might adopt to increase productivity. (2 marks)

Answer 1

ANSWER-A)

The expenditures approach:As per expenditure approach, the components of GDP are as follows

GDP = C + I + G + (X- M)

C = Private consumption expenditure

I = Investment Expenditure

G= Government Consumption Expenditure

X = Value of Exports

M = Value of Imports

Private consumption expenditure includes the monetary value of consumer goods and services which are either purchased by households or non-profit institutions for current usage during an accounting period. It consists of durable goods such as car, TV; non-durable goods such as food; and services such as doctor's service; legal service. All these goods and services have monetary value purchased by the households or non-profit institutions thus are included in GDP.

Investment Expenditure is an addition to the physical stock of capital during a period of accounting. For example: construction of factories and offices, building of machinery, housing construction, and additions to a firm’s inventories of goods is an addition to physical stock of capital thus included in GDP.

Government Consumption Expenditure includes the goods and services purchased by Central, State and local Government. For example: The Government expenditure on military equipment’s, bridges, etc. is paid by the government thus included in GDP

Net Exports depicts the difference between domestic spending on foreign products (means imports) and foreign spending on domestic products (means exports).

As per policy we have to answer first question