Assume that Country A has a population of 500,000 and only produces 1 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. Discuss the following:
What is Country A's GDP?
What is the composition of GDP by percentage?
What is the GDP per capita?
How does this relate to Keynesian economics?
Go to the Bureau of Economic Analysis at this Web site, and look up the latest new release for real GDP. Address the following questions after reading the latest release:
Where is the United States in the business cycle?
What is the real GDP today?
What is the largest component of GDP?
What is the smallest component of GDP?
What is the fastest growing component of GDP, and why?
What components of GDP were involved in the change from last month to this month?
What is the price index today?
What caused the change?
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Keynesian economics believed strongly on the demand forces while classical economists were on the view that supply creates its own demand. Keynesian economics believed in the short run specially during the time of economic recessions when the economic output strongly influenced by the aggregate demand of the economy.
According to Keynesian economics, government intervention plays a vital role to maintain the stable equilibrium in the economy. Keynesian theory advocates that market is imperfect and not self-sustaining rather government intervention is highly required to maintain the full employment equilibrium.
Keynesian economics formulated an income expenditure model where total income is comprised of consumption expenditure, investment expenditure, government expenditure and net exports The equilibrium level of GDP can be determined at the point where aggregate demand is equal to aggregate expenditure Y=AE.
Since we have applied the same concept in our above analysis, this is closely related to Keynesian economics.