Assume that Country A has a population of 500,000 and only produces one good: cars. Country A produces 100,000 cars per year. The people in Country A purchase 90,000 cars, but there are not enough cars to fulfill all the demand. They decide to import 50,000 more. The government buys 25,000 cars for its police force, and 10,000 cars are bought by companies to transport employees to other locations to work. They also export 65,000 cars to nearby countries for sale.
- What is Country A's GDP?
- What is the composition of GDP by percentage?
- What is the GDP per capita?
- If government purchases go up in the short run, what happens to GDP? Show this graphically.
- If consumption and government purchases go up, what happens to GDP in the long run? Why? How would this look in a graph?
- How does this relate to Keynesian economics?