Businesses use the GDP as a planning tool to decide whether they will expand or contract in the coming year. If the GDP has grown since the last year, a company may take the growth as a positive sign and hire more employees, build a new factory or purchase more raw materials for production. Conversely, when the GDP shrinks, firms may not focus on expanding their operations. Instead, many will concentrate on survival.when a country releases its GDP data, its currency can appreciate or depreciate as a result.A low GDP will cause a government to embark on a different economic policy, one which will boost economic performance. If, on the other hand, the GDP rises from the previous year, the government will propose policies to maintain economic growth, but will also seek to prevent inflation.ising or shrinking GDP also affects interest rates. The interest rate refers to the amount of money charged for loans. In the U.S., the Federal Reserve sets the basic interest rates. If the GDP rises, it means the economy has grown. GDP growth also means that people are spending more money to purchase goods on the market.
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.
2. Business Investment
3. Government Spending
4. Net Exports of Goods and Services
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