Final answer:
The formula to calculate GDP based on its spending components is GDP = C + I + G + (X - M), which includes consumption, investment, government spending, and net exports. This formula helps to determine the economic health of a nation.
Step-by-step explanation:
The correct formula to calculate Gross Domestic Product (GDP) based on its spending components is GDP = C + I + G + (X - M), where 'C' represents consumption spending by households, 'I' stands for investment spending by businesses, 'G' signifies government spending on goods and services, 'X' is exports, and 'M' is imports. When calculating GDP per capita, this formula is adjusted by the population size using the following formula: GDP per capita = (C + I + G + (X - M)) / Population.
Example Calculation of GDP
Using sample values from the given data:
C (Consumption) = $2,000 billion
I (Investment) = $50 billion
G (Government spending) = $1,000 billion
X (Exports) = $20 billion
M (Imports) = $40 billion
The calculation would be:
GDP = C + I + G + (X - M) = $2,000 billion + $50 billion + $1,000 billion + ($20 billion - $40 billion) = $3,030 billion.
Understanding net exports (X - M) is crucial as it reflects the balance of trade with the rest of the world. Following this method provides insight into the economic activity and health of a country.