• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

There are four major components of GDP. Describe each of these components, including a discussion of the way in which each contributes to GDP.

Extracts from this document...


Question 1 a) There are four major components of GDP. Describe each of these components, including a discussion of the way in which each contributes to GDP. The four major components of GDP(Y) are household consumption (C), investment (I), government spending (G) and net exports (NX). Their relationship can be express as an identity: Y=C+I+G+NX Household consumption (C), calculated in the Australian National Accounts as private final consumption expenditure, is the expenditure on goods and services by households, such as the Rose's dinner at Garden Hotel. It is made up of spending on durable goods (cars, appliances and furniture), non-durable goods (food, clothing, soap and petrol) and services (education, medical). Consumption can be influences by 4 main factors, they are disposable income (income-net taxes), expected future income, wealth, and interest rates. Consumption is a function of GDP because disposable income relies on GDP and net taxes are a proportion of GDP. Figure (a) shows positive the relationship between real consumption expenditure and real GDP. The bold line is an estimate of the consumption function for real GDP. Generally, the biggest portion of GDP is consumption, which averages around 60 percent. Consumption is regarded as the most stable component of GDP and investment the most volatile. Since disposable income can only be consumed or saved, and saving is equal to investment, the more consumption is, the less investment is. Gross investment (I) is the spending on new buildings (residential, commercial, and public), new inventory and new. For example, Jack purchases a new house. It is measured in the Australian National Accounts as private gross fixed capital expenditure. ...read more.


This change in household behaviour is shown in the figure 1.2 as a movement along the supply curve from S1 to S2. Thus, the equilibrium level drops to E2. . c) A rise in real interest rate Investors focus the real interest rate rather than the nominal interest rate. The rise in real interest rate means that investors now should pay more to borrow for purchasing new capital. It alters the incentive of investment. Meanwhile, the real interest rate rise the return of saving, so it would affect the amount that household save at any given interest rate, That is to say, it would influences the supply of loanable funds. Because the incentive of investment decreased, firms would diminish the amount they wanted to invest, the quantity of loanable funds demanded would be lower at any given interest rate. This change is shown in the figure 1.3 as a movement along the demand curve from D1 to D2. The level of investment decreases. The quantity of demand decreased raise the interest rate from Ir1 to Ir2, and the higher level of interest rate in turn inspire the amount of private saving. The level of private saving therefore rises. As figure 1.3 shows, the quantity of loanable funds supplied increased from Q1 to Q2, which is represented by a movement along the supply curve. It results in a surplus (Q3 - Q2) at the Ir2 level. That is, the quantity of supply would exceed the quantity demanded as a result of the rise in real interest rate. ...read more.


Usually, the higher the wages are the fewer workers would choose to leave. But the required payment for preventing the premium employers leaving is also dependent on a worker's prospects for finding a new job. If these prospects are high, (it means unemployment is low), such payment would also be high. Workers' productivity Higher wage make workers desire to stay in the job. Then motivate workers to do their best. Unemployment menace people with higher wage to work hard. If the wage is equal to the equilibrium level, there is no reason for workers to work hard, because they would find a job of same wage quickly. So, firms made wage higher, cause unemployment, and motivate workers do not shirk. Workers' quality Firms can attract higher quality worker by paying an efficiency wage. For example, Susan is a skilled worker and she would work for any wages above $10 per hour. Alice is a worker with lower skill level and she would work for any wages above $3 per hour. If a firm pay the wage of $11 per hour, both Susan and Alice would apply for the job and the firm can choose the proper one from the two. As a result, one would be unemployed. However, firms that pay efficiency wage could not afford to employ a very large amount at that wage. So the low unemployment would not be sustainable. The rate of unemployment would rise and, correspondingly, wages would fall until equilibrium was reached. Therefore, though paying efficiency wage would cause a short-term low unemployment. While this unemployment grows, the wages would be forced to fall until the unemployment is cleared at the equilibrium level. ?? ?? ?? ?? Katarina Page 1 of 14 5/7/2007 ...read more.

The above preview is unformatted text


Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Political & International Economics essays

  1. Trade unions are organised groups of employees who consisto f workers of one or ...

    After talking about the British trade union movement and describing its role within the British society , it is being asked to examine the Swedish trade union movement in order to see , by making comparisons , in which country trade unions perform effectively and bring more success .

  2. Conservative Consulting ltd - Proposal and investment Plan, conservative consulting's investment proposal for Mr ...

    Bonds allow for more control over ones choices and although less secure than a fund, they will generally give a fixed income that does not eat into your principal. Bond funds, however, will generate a more variable income due to the constant additions and elimination's from the portfolio in response to market conditions/investor demand.

  1. AT Kearney management consulting report for Acer.

    Concerning their ability to payoff debt their current ratio of 2000 was 189.61 and decrease slightly to 180.02. Furthermore concerning their earning ability their pay-in capital ratio decreases from 38.92 % in 2000 to 12.66% in 2001. And finally their cash flow ratio decrease from 20.68% in 2000 to 12.10%

  2. To what extent do major sporting events act as a focus for inward investment?

    An issue to be discussed is 'why do countries bid for the major sporting events?' The prime reason is the economic benefits it brings in i.e. the multiplier effect. This is where a new economic activity in an area creates extra employment and raises the total purchasing power of the

  1. Which component of expenditure consumption or investment, appears to be the most volatile? Is ...

    But the magnitude of change in the Real Investment is slightly more than the magnitude of change in Real Consumption. In this economy the Real Investment is more volatile than the Real consumption. Canada: The economy shows a lot of variations in the given period of study but maintains an


    besides the official exchange rate, with the motive of attracting foreign remittances from nationals working abroad, and hence the "duality." Another form of "duality" is reflected by the export subsidies introduced under the Export Performance License (EPL) scheme. In this scheme, exporters were given "extra sterling as bonus to encourage

  1. &amp;quot;Is a rise in the saving and investment rate a precondition for successful development?&amp;quot;

    able to make use of funds which may be collected from a diverse array of sources and would otherwise be unattainable. Finally there the investment projects themselves need to be conducted with the resources being used to increase the size of the capital stock.

  2. The Theory of Human Capital: Egypt and the USA examined.

    Investments on Education in Egypt According to Nancy Birdsall and Lesley O'Connell, the investments on education in Egypt are pretty significant, providing free pre-college education. For a more detailed illustration of the numbers, please refer to figure 4.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work