GDP and the Business Cycle

GDP and business cycle
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Part I
The Gross Domestic Product (GDP) basically measures the value of economic activity in a particular nation. It is understood as the sum of the market prices or values of every final service or good produced within an economy in a period of time.
Country A’s GDP: Assuming 1 car is $2,000, calculating GDP using expenditure approach is as follows:
GDP = C + I + G + (X – M), where C, stands for the consumers’ spending; I for investment; G stands for government expenditure; X for exports and M for imports, (X – M) is Net Exports.
GDP = 90,000 + 10,000 + 25,000 + (65,000 – 50,000) = 140,000
140,000 x $2,000 = $280,000,000
Composition of GDP by percentage:
Consumer spending: 90,000/140,000 x 100 = 64.29%
Investments: 10,000/140,000 x 100 = 7.14%
Government spending: 25,000/140,000 x 100 = 17.86%
Net exports (X – M): 15,000/140,000 x 100 = 10.71%
GDP per capita
GDP per capita = GDP ÷ population
140,000 ÷ 500,000 = 0.28
How this relates to Keynesian economics: The Keynesian model of aggregate expenditure relates aggregate expenditure, which is basically the exports at a certain price level, to the GDP level. GDP of the country is similar as aggregate expenditures (AE) with the exception of one difference. Governments, companies and people do not always spend what they had planned. Thus, aggregate expenditure differs from Gross Domestic Product in the sense that it deals primarily with amounts that companies intend to invest, and not essentially considering amounts that will really be invested as in GDP (Blinder, 2010). The GDP of country relates to Keynesian economics in that AE is utilized together with GDP of the country in the AE model in predicting future GDP direction of the country. If GDP = AE, the country A’s economy would be in equilibrium. As per this model, the economy would move t...