Assume That Country A Has A Population Of 500,000 And Only P

Assume That Country A Has a Population Of 500000 And Only Produces On

Assume that Country A has a population of 500,000 and only produces one good—cars. Country A produces 100,000 cars per year. The people in Country A purchase 90,000 cars, but there are not enough cars to fulfill all the demand. They decide to import 50,000 more. The government buys 25,000 cars for its police force, and 10,000 cars are bought by companies to transport employees to other locations to work. They also export 65,000 cars to nearby countries for sale.

What is Country A’s GDP? what is the composition of GDP by percentage? What is the GDP per capita? If government purchases go up in the short run, what happens to GDP? Show this graphically. If consumption and government purchases go up, what happens to GDP in the long run? Why? How would this look in a graph? How does this relate to Keynesian economics?

Paper For Above instruction

Calculating the gross domestic product (GDP) of Country A involves synthesizing the components of production, consumption, government spending, and net exports. Given the data, Country A's GDP can be determined through the expenditure approach, which sums consumption (C), investment (I), government purchases (G), and net exports (NX). Since the country exclusively produces cars, these components translate directly into the car market data provided.

Understanding the Components of GDP

The total cars produced annually are 100,000, serving as the primary indicator of the production component within GDP. Despite the domestic production, the actual consumption (which includes purchases by consumers, government, and businesses) exceeds local purchases due to imports and exports. Consumers buy 90,000 cars, but imports of 50,000 cars are also added to their total consumption to account for out-of-country purchases. The government purchases 25,000 cars, and businesses purchase 10,000 cars for operational needs; these latter purchases are considered part of investment or government consumption depending on context but are included within government expenditure here.

Calculating GDP

GDP is calculated as:

• GDP = C + I + G + (X - M)

Where:

• C = Consumer purchases = 90,000 cars
• I = Business investments (cars purchased for transport by companies) = 10,000 cars
• G = Government purchases = 25,000 cars
• X = Exports = 65,000 cars
• M = Imports = 50,000 cars

Substituting the values:

GDP Calculation

GDP = 90,000 + 10,000 + 25,000 + (65,000 - 50,000) = 90,000 + 10,000 + 25,000 + 15,000 = 140,000 cars

To express this in monetary terms, assume each car costs $20,000 (a typical average price). Therefore, GDP in monetary value is:

GDP in Monetary Terms

GDP = 140,000 cars × $20,000 per car = $2,800,000,000 (2.8 billion dollars)

GDP Per Capita

GDP per capita is obtained by dividing GDP by the population:

GDP per capita = $2,800,000,000 / 500,000 = $5,600

This figure provides insight into the average economic output per person, highlighting the country's standard of living.

Impact of Changes in Government Purchases and Aggregate Demand

If government purchases increase in the short run, aggregate demand (AD) shifts rightward in the Keynesian model, leading to a rise in real GDP and potentially higher employment levels. Graphically, the AD curve shifts to the right, moving the equilibrium from point A to point B, with an accompanying increase in output and possibly prices if the economy approaches full capacity.

Long-Run Effects of Increased Consumption and Government Spending

In the long run, increased consumption and government expenditure can lead to economic growth through increased investment in capital, technological advancement, and improved productivity. According to Keynesian economics, persistent increases in aggregate demand can stimulate output beyond the economy’s potential, but in the long run, this may cause inflationary pressures. The aggregate supply (AS) curve may shift rightward over time due to increased productivity, eventually restoring equilibrium at a higher level of potential output. Graphically, this is depicted by a rightward shift in both AD and AS curves, resulting in increased equilibrium output with stable prices if supply-side improvements occur.

Relation to Keynesian Economics

Keynesian macroeconomic theory emphasizes the role of aggregate demand in influencing economic output and employment levels. During periods of economic slack, increases in government spending and consumption can effectively stimulate demand, reduce unemployment, and foster economic growth. The analysis of short-term fiscal policy impacts, as described here, aligns with Keynesian principles, which advocate for active government intervention to manage economic fluctuations, particularly in recessions. The long-term considerations, such as supply-side growth, also echo Keynesian insights about the importance of investment and productivity enhancements for sustainable growth.

Conclusion

Country A’s GDP, calculated via the expenditure approach, stands at $2.8 billion with a per capita figure of $5,600. Short-term increases in government spending boost economic activity by shifting aggregate demand outward, which can be illustrated graphically by a rightward AD shift. Long-term growth depends on sustained increases in consumption and government spending coupled with improvements in supply-side factors, consistent with Keynesian economic theory's emphasis on demand management and investment as catalysts for growth.

References

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