Relationship Between Aggregate Demand And Gdp Essay
(A) What is GDP? Provide at least two interpretations of the concept GDP
It is a measure of the size of the economy, the total amount it produces in a year. Real GDP adjusts this measure for changes in the purchasing power of money, that is, it corrects for inflation.
• GDP used to interpret many economic issues such as the economic performance.
• GDP per capita is used to evaluate the standard living of the people within an economy. It is a measure of the total output of a country that takes the gross domestic product (GDP) and divides it by the number of people in the country.
(B) Explain the relationship between Aggregate Demand and GDP.
Gross domestic product (GDP) is a way to measure a nation 's production. Aggregate demand used GDP to show how it relates to price levels. Aggregate demand is the total demand for final goods and services in the economy in a given period as a function of prices. This is relationship between price and GDP. This is downward sloping curve since when the price is low, people would feel richer and spend more and GDP is high.
(C) Develop a mathematical model explaining GDP, and describe the impact of each its components.
Y = C + I + G + (X – M).
C= consumption, I is investment, G is government expenditure, X is exports and M is imports.
If consumption investment, government expenditure or export increase, GDP will increase. If imports increase, GDP will decrease. If a foreigner firm produces a car in the US in…