The Closed Economy: An Introduction
GDP stands for Gross Domestic Product. GDP tells us the nation’s total income and the total expenditure on its output of goods and services. There are two ways of measuring GDP. The first is as the sum of the total income of everyone in the economy. The second is the total expenditure on the economy’s output of goods and services. We will focus on the expenditure method for this tutorial.
There are four components to GDP (of which three are considered in the Closed Economy). These are:
Because all expenditure in the economy must fall into one of these four categories, they must add up to total GDP. Thus letting Y stand for GDP results in:
Y = C + I + G + NE
In this example we will consider the closed economy which assumes that a country does not engage in trade. Therefore, there are no exports or imports and as a result of this there is no Net Exports (NE) term.
The below video discusses the components of the closed economy.
There are four components to GDP (of which three are considered in the Closed Economy). These are:
- Consumption (C) = households final consumption expenditure plus final consumption expenditure of clubs, societies and charities.
- Investment (I) = business investment plus residential investment plus inventory investment
- Government Purchases (G) = general government consumption plus general government investment
- Net Exports (NE) = exports minus imports plus net tourism.
Because all expenditure in the economy must fall into one of these four categories, they must add up to total GDP. Thus letting Y stand for GDP results in:
Y = C + I + G + NE
In this example we will consider the closed economy which assumes that a country does not engage in trade. Therefore, there are no exports or imports and as a result of this there is no Net Exports (NE) term.
The below video discusses the components of the closed economy.
