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Questions and Answers
What is consumption?
Goods and services purchased by final consumers.
What does Gross Capital Formation (I) include?
Fixed investment and change in inventories.
What is the difference between government consumption and government investment?
Government consumption satisfies current needs; government investment creates future benefits.
Government spending (G) includes government transfers and interest payments.
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What do imports (M) represent?
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What are net exports (NNN)?
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The sum of all components of spending is known as the ______.
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What is the national accounting identity?
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Which of the following components is not included in government spending?
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Match the economic terms with their definitions:
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Study Notes
Consumption
- The goods and services purchased by final consumers
- Divided into durable and non-durable goods
Gross Capital Formation
- Also known as investment
- Divided into two categories:
- Fixed Investment
- Firms purchasing new plants and machines (non-residential inv.)
- Individuals purchasing new dwellings (residential inv.)
- Both purchases yield future output (fixed capital)
- Change in Inventories
- The inventory change represents the difference in the value of goods held by firms at the beginning and end of the period
- Includes raw materials and partially finished goods
- Fixed Investment
Government Spending
- Goods and services purchased by the government
- Divided into two categories:
- Government consumption:
- Purchases for the direct satisfaction of individual or collective needs of members of the community
- Includes value of services provided by government employees
- Government investment:
- Purchases intended to create future benefits, such as infrastructure investment or research spending
- Government consumption:
- Does not include government transfers nor interest payments on public debt
Imports
- Purchases of foreign goods and services by domestic consumers, firms, and the government
Exports
- Purchases of domestic goods and services by foreigners
Net Exports
- The difference between exports and imports
- Trade balance: A surplus if exports > imports, or a deficit if exports < imports
Aggregate Demand
- The total spending on the domestic goods and services in an economy
- Calculated as: Aggregate demand equals Consumption + Investment + Government spending + Net exports
GDP
- GDP is the total value of all goods and services produced within a country during a specific period
- By construction, aggregate demand is equal to GDP
- This gives us the national accounting identity: GDP equals Consumption + Investment + Government Spending + Net Exports
Italy and EU Breakdown of GDP in 2019
- Italy GDP: 1,787,664 million €
- EU (28 countries) GDP: 16,464,168 million €
- Italy domestic demand: 1,732,748 million € (96.9% GDP)
- EU domestic demand: 15,967,538 million € (97.0% GDP)
- Italy final consumption expenditure: 1,411,552 million € (79.0% GDP)
- EU final consumption expenditure: 12,397,693 million € (75.3% GDP)
- Italy households (C): 1,075,404 million € (60.2% GDP)
- EU households (C): 9,050,593 million € (55.0% GDP)
- Italy general government (G): 336,148 million € (18.8% GDP)
- EU general government (G): 3,347,099 million € (20.3% GDP)
- Italy gross capital formation (I): 321,196 million € (18% GDP)
- EU gross capital formation (I): 3,569,845 million € (21.7% GDP)
- Italy gross fixed capital formation: 322,724 million € (18.1% GDP)
- EU gross fixed capital formation: 3,512,618 million € (21.3% GDP)
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Description
This quiz covers key concepts related to consumption, gross capital formation, and government spending. It explores the distinctions between durable and non-durable goods, fixed investments, and government consumption. Test your understanding of how these elements contribute to the economy.
