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    Macro Assignment

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    Abdul Nasir Nichari
    This document summarizes the key components of GDP and explains the balanced budget multiplier. It outlines the four main components of GDP as consumption, investment, government purchases, and net exports. It then explains that if government expenditure and taxes increase by the same amount, output will increase by that same amount due to offsetting impacts on aggregate demand. Specifically, the spending multiplier is offset by the negative tax multiplier, resulting in no change to the budget deficit and a balanced budget multiplier of 1.

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    Macro Assignment

    Uploaded by

    Abdul Nasir Nichari
    29 views4 pages
    This document summarizes the key components of GDP and explains the balanced budget multiplier. It outlines the four main components of GDP as consumption, investment, government purchases, and net exports. It then explains that if government expenditure and taxes increase by the same amount, output will increase by that same amount due to offsetting impacts on aggregate demand. Specifically, the spending multiplier is offset by the negative tax multiplier, resulting in no change to the budget deficit and a balanced budget multiplier of 1.

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    This document summarizes the key components of GDP and explains the balanced budget multiplier. It outlines the four main components of GDP as consumption, investment, government purchases, and net exports. It then explains that if government expenditure and taxes increase by the same amount, output will increase by that same amount due to offsetting impacts on aggregate demand. Specifically, the spending multiplier is offset by the negative tax multiplier, resulting in no change to the budget deficit and a balanced budget multiplier of 1.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    29 views4 pages

    Macro Assignment

    Uploaded by

    Abdul Nasir Nichari
    This document summarizes the key components of GDP and explains the balanced budget multiplier. It outlines the four main components of GDP as consumption, investment, government purchases, and net exports. It then explains that if government expenditure and taxes increase by the same amount, output will increase by that same amount due to offsetting impacts on aggregate demand. Specifically, the spending multiplier is offset by the negative tax multiplier, resulting in no change to the budget deficit and a balanced budget multiplier of 1.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Assignment NO: 01

    Department of Economics

    Topic: “Write down the different components of GDP and also


    explain what happens if government expenditure and taxes increase by
    same amount?”

    Subject: Macroeconomic Theory I

    Submitted by: Abdul Nasir

    Roll No: F20BECON1M01072


    Section: B

    Submitted to: Prof. Dr. Rashid Sattar.

    Submission Date: 06.10.2022


    Components of GDP

    The economy’s gross domestic product measures total income and total
    expenditure in the economy. Because GDP is the broadest gauge of overall
    economic conditions.
    Economists and policymakers care not only about the economy’s total output of
    goods and services but also about the allocation of this output among alternative
    uses. The national income accounts divide GDP into four broad categories of
    spending:

     Consumption (C)
     Investment (I)
     Government purchases (G)
     Net exports (NX).

    Thus, letting Y stand for GDP,


    Y = C + I + G + NX.

    GDP is the sum of consumption, investment, government purchases, and net


    exports. Each dollar of GDP falls into one of these categories. This equation is
    an identity—an equation that must hold because of the way the variables are
    defined. It is called the national income accounts identity.

    Consumption consists of the goods and services bought by households. It is


    divided into three subcategories: nondurable goods, durable goods, and services.
    Nondurable goods are goods that last only a short time, such as food and clothing.
    Durable goods are goods that last a long time, such as cars and TVs. Services
    include the work done for consumers by individuals and firms, such as haircuts
    and doctor visits.

    Investment consists of goods bought for future use. Investment is also


    divided into three subcategories: business fixed investment, residential fixed
    investment, and inventory investment. Business fixed investment is the purchase
    of new plant and equipment by firms. Residential investment is the
    purchase of new housing by households and landlords. Inventory investment
    is the increase in firms’ inventories of goods (if inventories are falling, inventory
    investment is negative).

    Government purchases are the goods and services bought by federal, state,
    and local governments. This category includes such items as military equipment,
    highways, and the services provided by government workers. It does not include
    transfer payments to individuals, such as Social Security and welfare. Because
    transfer payments reallocate existing income and are not made in exchange for
    goods and services, they are not part of GDP.

    The last category, net exports, accounts for trade with other countries. Net
    exports are the value of goods and services sold to other countries (exports)
    minus the value of goods and services that foreigners sell us (imports). Net exports are positive
    when the value of our exports is greater than the value of our imports and negative when the
    value of our imports is greater than the value of our exports. Net exports represent the net
    expenditure from abroad on our goods and services, which provides income for domestic
    producers.
    What happens if government expenditure and taxes increase by same
    amount?

    For the increase of government expenditure and taxes by same amount we use the concept of

    Balance Budget Multiplier.

    The Balanced-Budget Multiplier

    Essentially, this multiplier tells us what the impact will be on the GDP if you increase both

    government spending and taxes equally. For example, if the government wanted to increase

    government spending by, let’s say, $2 billion, but did not want to run a deficit, and therefore also

    increased taxes by $2 billion. We’ll look at each of these actions independently and then put

    them together to find a generalized answer.

    Assume the MPC is equal to .8. With an MPC of .8, the government spending multiplier is 5—if

    the government increases spending by $2 billion, output will go up by $10 billion. If the MPC

    is .8, the tax multiplier is -4—if the government increases taxes by $2 billion, output will go

    down by $8 billion. When these two things happen simultaneously, the net effect is to increase

    output by $2 billion ($10 billion - $8 billion = $2 billion). So an increase in government

    spending by $2 billion and a simultaneous increase in taxes by $2 billion will increase output by

    $2 billion. The balanced-budget multiplier is equal to 1 and can be summarized as follows: when

    the government increases spending and taxes by the same amount, output will go up by that same

    amount. We can generally show that the balanced budget multiplier is equal to one, and that it is

    not dependent on the size of the MPC: when you sum the spending multiplier and the tax

    multiplier, you always get one, regardless of the MPC.

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