In 2020, in the country of Fornesia, the total household consumption was $1000 million, and households paid taxes of $200 to the government. The government of Fornesia spent $500 million on defence and infrastructure and $47 million on social security benefits to the public. The firms held an inventory amounting to $35 million in January 2020, and the total inventory amounted to $50 million at the end of December 2020. The firms invested $25 million as fixed investment in capital. The capital depreciated by $5 million in 2020. Fornesia exported $90 million worth of goods abroad and imported $75 million from other foreign countries.

In 2019, Fornesia GDP was $1455. What is the GDP growth in 2020? (answer in terms of percentages, up to 2 decimal places)?

Question

In 2020, in the country of Fornesia, the total household consumption was $1000 million, and households paid taxes of $200 to the government. The government of Fornesia spent $500 million on defence and infrastructure and $47 million on social security benefits to the public. The firms held an inventory amounting to $35 million in January 2020, and the total inventory amounted to $50 million at the end of December 2020. The firms invested $25 million as fixed investment in capital. The capital depreciated by $5 million in 2020. Fornesia exported $90 million worth of goods abroad and imported $75 million from other foreign countries.

In 2019, Fornesia GDP was $1455. What is the GDP growth in 2020? (answer in terms of percentages, up to 2 decimal places)?

BlackTom AI · Accepted Answer

In tackling this numerical question, I will first restate the key data and then outline the standard approach to calculate GDP growth.

Key data for 2020:
- Household consumption (C) = 1000
- Government spending (G) = 500 on defence and infrastructure (transfers like social security benefits are not counted in G)
- Exports (X) = 90
- Imports (M) = 75
- Fixed investment (part of I) = 25
- Change in inventories = ending inventory (50) − beginning inventory (35) = 15
- Depreciation = 5 (not directly used in GDP calculation, as depreciation affects Net Domestic Product rather than GDP level itself)

Important notes on how GDP is typically calculated in a closed set of data:
- GDP (expenditure approach) = C + I + G + (X − M)
- Here, I represents gross investment, which equals fixed investment plus changes in inventories: I = 25 + 15 = 40
- Transfers such as social security benefits are payments from the government to individuals and are not considered government spending on goods and services; thus they are not included in G
- Net exports (X − M) = 90 − 75 = 15

Now compute GDP for 2020 using the expenditure approach:
- C = 1000
- I = 40 (25 fixed investment + 15 inventory change)
- G = 500
- NX = 15 (exports minus imports)

Sum these components to obtain GDP2020:
GDP2020 = 1000 + 40 + 500 + 15 = 1555

Next, recall the GDP value for 2019 was given as 1455. To find the GDP growth rate from 2019 to 2020, use the growth formula:
Growth rate = ((GDP2020 − GDP2019) / GDP2019) × 100%
Plugging in the numbers:
Growth rate = ((1555 − 1455) / 1455) × 100% = (100 / 1455) × 100%
Calculate the fraction: 100 / 1455 ≈ 0.06868
Convert to a percentage: 0.06868 × 100% ≈ 6.87%

Thus, the GDP growth from 2019 to 2020, in percentage terms, is approximately 6.87% (rounded to two decimal places).

ECON 4002.01 SU2025 (11437) Exam 1

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