Sample Essay

The President and Congress had taken the expenditure approach towards enhancing GDP. Under this approach GDP is equivalent to the sum of consumption expenditure (C), gross private domestic investment (I), government expenditures (G), and net export expenditures (Xn).  This is represented as GDP= C+I+G+Xn. Consumption refers to the personal expenditures done by all households in the economy on durable and non durable goods. It also includes the consumer expenditures on purchasing services. Gross private domestic investment includes purchases of machinery, equipment and tools by business firms, construction activities, and changes in inventory.  Government expenditures refers to the government consumption expenditures and gross investment on goods and services to provide public service. It also includes expenditures for social capital such as schools and roads which has long term effects.  Finally, net exports refers to the exports less imports of the total economy.

The government had decided to increase the government purchases (G) in this equation in order to increase GDP in time of recession. This constitutes to only one of the factors affecting GDP as demonstrated in the equation. In the aftermath of this expansionary fiscal policy enacted by the government, the resultant GDP was not at par with expectations. This could have been possible because the other factors in the expenditure model of GDP  were not supporting the government expenditures (G). For instance, the country might be facing decrease in consumption of goods in the economy and the trend of saving must have increased. Or  investment in equipment might be declining, with little construction activity and decreasing inventories. Alternatively, the economy might be facing a big trade deficit i.e. negative net exports because imports exceed exports. This consumption adds no value to the GDP of the country but to other countries. Therefore, all of these factors must be ailing the GDP that could not meet the desired level.

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