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The table below shows components of GDP taken from the Australian national accounts. Component of GDP$billionsInvestment Imports170Indirect taxes80Consumption600Government spending180Compensation of Employees (wages)650Exports180Gross operating surplus340 Suppose the estimate of GDP is the same using the income and the expenditure approaches. Using this information calculate the level of GDP and deduce the amount of investment, in billions of dollars.Group of answer choicesGDP is $990 and investment was $200GDP is $910 and investment was $120GDP is $1070 and investment was $280None of the other answers

Question

The table below shows components of GDP taken from the Australian national accounts. Component of GDPbillionsInvestment Imports170Indirecttaxes80Consumption600Governmentspending180CompensationofEmployees(wages)650Exports180Grossoperatingsurplus340 SupposetheestimateofGDPisthesameusingtheincomeandtheexpenditureapproaches.UsingthisinformationcalculatethelevelofGDPanddeducetheamountofinvestment,inbillionsofdollars.GroupofanswerchoicesGDPisbillionsInvestment Imports170Indirect taxes80Consumption600Government spending180Compensation of Employees (wages)650Exports180Gross operating surplus340 Suppose the estimate of GDP is the same using the income and the expenditure approaches. Using this information calculate the level of GDP and deduce the amount of investment, in billions of dollars.Group of answer choicesGDP is 990 and investment was 200GDPis200GDP is 910 and investment was 120GDPis120GDP is 1070 and investment was $280None of the other answers

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Solution

To calculate GDP using the expenditure approach, we add up consumption, investment, government spending, and exports, and then subtract imports.

Consumption = 600billionGovernmentspending=600 billion Government spending = 180 billion Exports = 180billionImports=180 billion Imports = 170 billion

We don't know the investment yet, so let's call it I.

So, GDP = Consumption + Investment + Government spending + Exports - Imports GDP = 600billion+I+600 billion + I + 180 billion + 180billion−180 billion - 170 billion

To calculate GDP using the income approach, we add up compensation of employees (wages), gross operating surplus, and indirect taxes.

Compensation of employees (wages) = 650billionGrossoperatingsurplus=650 billion Gross operating surplus = 340 billion Indirect taxes = $80 billion

So, GDP = Compensation of employees (wages) + Gross operating surplus + Indirect taxes GDP = 650billion+650 billion + 340 billion + 80billion=80 billion = 1070 billion

Since the estimate of GDP is the same using the income and the expenditure approaches, we can set the two equations equal to each other and solve for I.

1070billion=1070 billion = 600 billion + I + 180billion+180 billion + 180 billion - 170billion170 billion 1070 billion = 790billion+II=790 billion + I I = 1070 billion - 790billion=790 billion = 280 billion

So, the level of GDP is 1070billionandtheamountofinvestmentis1070 billion and the amount of investment is 280 billion. Therefore, the correct answer is "GDP is 1070andinvestmentwas1070 and investment was 280".

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