Aggregate Demand Explain the Similarities

Aggregate Demand

Explain the similarities and differences between GDP and national income.

Theoretically, the total value for GDP and national income should be the same. National income is the total income of all individuals participating in the economy, including fictional individuals under the law like banks and corporations. National income is the sum of wages, interest, rents, and profits. GDP is the monetary value of all of the economic activity that takes place within a nation's borders. The sum should be the same, but the elements of the two terms are different.

Define Gross Domestic Product and Gross National Product. Then answer the following question: Why would a Honda manufactured in Ohio be included in U.S. GDP, while a General Motors vehicle manufactured in Mexico would not?

GDP measures all economic activity within the geographic borders, including the value of goods and services produced by foreigners and foreign countries. Unlike the GNP, GDP excludes the value of goods and services produced by U.S. citizens anywhere in the world.

Question 3: Please identify and describe the four components of GDP and answer the following question, making sure to demonstrate how you arrived at your solution. If GDP is $100 billion, consumption is $60 billion, investment is $30 billion, and net exports are -$5 billion, what is government spending in this economy?

GDP includes wages, interest, rents, and profits, so 60b+30b=90b-5b=85b, thus government spending would be 15b.

Question 4: Please define the oversimplified multiplier and use your knowledge of the concept to answer the following question. Suppose that GDP is currently $25,000 and the marginal propensity to consume is.50. If autonomous investment increases by $5,000, what will GDP be in the new equilibrium? Assume the oversimplified multiplier is accurate.

Any change in a component of aggregate demand will result in a larger change in equilibrium GDP, called the oversimplified multiplier. The equation would be: 1/1-.50=2.

This means that the oversimplified multiplier is 2, so instead of an increase of $25,000+5,000=30,000, the GDP will be $30,000, as the extra $5,000 should be multiplied by 2.