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Example Question #1 : Gross Domestic Product
GDP is a measure of the total economic output of a given country. The most common GDP calculation, known as the expenditure definition, defines GDP (Y) as the sum total of all consumer expenditures (C) plus investment (I) plus government spending (G) plus net exports (X-M). This defintion is often written as the equation:
Which of the components of GDP accounts for the majority of economic output in a given country?
They are all equal.
Consumer expenditure, or simply consumption, measures the economic output that is devoted to satisfying the wants and needs of individual consumers within an economy. Investment measures the amount of output that is directed toward business or other producers in order to grow the productive capacity of the economy. Government spending measures the amount of output that is directed toward government provision of goods and services, such as roads or police protection. Net exports measure the amount of output that is traded with other countries, and since a country can run either a trade deficit or surplus, this component can be positive or negative. In most modern market or mixed economies, people are relatively free work and consume as they choose. As a result, a majority of economic output in most countries is devoted toward consumer expenditures. Some countries have especially large government sectors, where government spending comes close to matching the consumer sector of the economy. In the United States, consumer expenditure accounts for nearly 2/3 of economic output.