Tutor profile: Michael L.
What are the factors that affect consumption?
1) Expected income: when income is expected to increase, consumption increase. Also, when expected income decrease, consumption decrease. 2) Wealth: increase in wealth, increases consumption and vice versa. 3) Real interest rate: when the interest rate increase, consumption can decrease or increase depending on whether the substitution effect or the income effect is stronger. 4) Changes in fiscal policy: when the government increases it spending, consumption increases and the opposite is true. The decrease in government spending decreases consumption. However, in Ricardian equilibrium changes in fiscal policy does not change consumption.
Why are diamonds more expensive than water although water is essential for survival?
This question is known as the ' diamond and water paradox', which shows that water has a huge demand, but is cheap. On the other hand, we have diamonds, they have very small demand compared to water and are extremely expensive. This arises from what is known as scarcity. Diamonds are very rare so their supply is very low causing it to have such a high price. Water is in abundant supply which makes it cheap, in spite of the high demand for it.
How to measure Gross Domestic Product (GDP)?
There is 3 way to measure the GDP of any economy: 1) Value-added approach: which is calculating the output of every industry separately and then adding them all together, given by this equation: *Value-added = value of output - value of inputs used in production 2) The expenditure approach: is adding up all the spending need to be done to buy final goods and services. The equation used for this approach is : GDP= Consumption + Investment + Government spending + (Exports-Imports) 3) Income approach: When the output is produced income is generated so income is equal to the value of the outputs produced.
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