Gross Domestic Product - Essay Example

Gross domestic product (GDP) refers to the monetary value of all finished goods and services produced within a particular period in an economy (Mankiw, 2012). It is calculated by adding government purchases, investment, consumption and net exports. The GDP based on the provided income data is $761.6 billion. The GDP less depreciation is the Net domestic product (NDP). According to Arnold (2010), NDP refers to the net monetary value of goods and services attributed to property and labour in specified period in an economy.

Based on the national income data provided, the NDP was found to be $738 billion. The other method of measuring the income is national income (NI) that refers to the returns that the owners of production (capital, organization, land, and labour) gain in an economy (Fernando, 2011). The national income based on the data provided is $732 billion. Comparisons between 1980 and 2010 A comparison of $40,000 earned in 1980 and 2010 can be made by first finding the number of times the consumer price index has decreased or increased from 1980 to 2010.

In 1980 and 2010 the consumer price indexes were 82.4 and 236.74 respectively. The percent increase in the inflation rate from 1980 to 2010 was 187%. The average consumer price index went up 1.87 times between 1980 and 2010. The increases in CPIs show that the available products in 2010 were more expensive that they were in 1980. Concerning quality, some of the products have increased quality from 1980 to 2010 because of technological advancement. Good examples are electronics and cars that were more energy efficient in 2010 than they were in 1980.

On the contrary, some products were of poorer quality in 2010 than they were in 1980. A person would be wealthier if he/she earned $ 40,000 in 1980 than making the same amount in 2010. The purchasing power in 1980 was greater than purchasing power in 2010. So, the person would buy more products or assets in 1980 than in 2010. One would choose to live 1980 because prices of products were less expensive than in 2010. If an individual were to determine which year he would have liked to live, the most appropriate and practical answer would be 1980.

A person earning $40,000 in 1980 would live more comfortably that another individual who is receiving the same amount in 2010 because products were cheaper in 1980 than in 2010. Based on the model provided, the equilibrium level of income was found to be $640 billion. This value was found by replacing the values of consumption, investment, and net export into the GDP equation. When the investment changed from $20 billion to $15 billion, the equilibrium level of income dropped to $620, meaning that the GDP of an economy reduces with a decrease in investments but with a constant multiplier If there is an increase in spending by $5 billion for every percent for every percent increase in household wealth and fall in investment by $20 billion for every percent point rise in interest rate, the AD curve shifts to the right by 15 billion ($20 - $5 billion).

Again if there is a decrease in household wealth and interest rates by 5% and 2% respectively, the AD curve to shift to the right by net $15 billion. The increase in spending causes the GDP to rise while fall in investment decreases the GDP. The net effect of these changes was found to be positive $15 billion. The effect when the multiplier was considered is $60 billion. The aggregate demand and supply from the hypothetical income data provided, in this case, was $320 billion. The equilibrium price is $200.

At this price, the Amount of Real GDP demand is equal to the quantity of real GDP supplied. At any price greater than $250 the level will demand fall below aggregate supply. The new equilibrium price is $210 when the total demands shifts by $20 billion. The equilibrium demand and price are $320 billion and $210 respectively. References Arnold, R. A. (2010). Economics. Australia: South-Western Cengage Learning. Fernando, A. C. (2011). Business environment. Chennai: Pearson. Mankiw, N. G. (2012).

Principles of economics. Mason, OH: South-Western Cengage Learning.