Question

1. In an economy at full employment, Y=C+I+G+NX. List, define, and explain, the component parts of the formula. Would you consider our Economy at Full Employment now? Why or why not?

Answer 1

The expenditure approach for GDP is given by the formula Y=C+I+G+NXY=C+I+G+NXand represents the total spending on final new goods and services produced in a country within a given year. Full employment is defined as when most people who are willing and able to work in a nation can find jobs. It represents the absence of cyclical unemployment in the economy but does include frictional and structural unemployment, which are components of the natural rate of unemployment (NRU). Nations go through short-term fluctuations in GDP as they follow the business cycle and experience periods of economic expansion followed by periods of economic contraction. The full employment rate varies among countries, but in the U.S. it's considered to be between 4 - 5%.

Consumption (CC): consists of household purchases of services and non-durable and durable goods.

Investment (II): represents firm-based and household-based purchases of real capital. For firms this includes spending on capital goods like equipment, machinery and buildings. For households this includes spending on housing and new construction.

Government spending (GG): consists of government purchases, including salaries for workers as well as spending on capital goods.

Net exports (NXNX): counts all exports (XX) as an inflow and thus an increase in GDP, but subtracts spending on foreign imports (MM), which are considered an outflow and decrease GDP.