Question 1 Report
Table 1 shows estimates made by an economic research unit for the island of Lydora. All figures are measured in million lyds.
| Item | Value, million lyds |
|---|---|
| Household consumption | 480 |
| Investment by firms | 125 |
| Government spending | 160 |
| Exports | 90 |
| Imports | 110 |
(a) Calculate Lydora's gross domestic product using the expenditure method. Show your working. [2]
(b) Explain one reason why a rise in investment by firms may increase economic growth. [2]
(a) GDP using the expenditure method adds consumption, investment, government spending and exports, then subtracts imports. Imports are subtracted because they are included in spending but are not produced within Lydora.
\[GDP = 480 + 125 + 160 + 90 - 110 = 745\]
Therefore, Lydora’s GDP is 745 million lyds. [2 marks]
(b) Investment is spending by firms on capital goods, such as machinery, buildings or equipment. It can increase the quantity or quality of capital available, raising productive capacity. Firms can then produce a greater quantity of goods and services, so real GDP rises and economic growth occurs. [2 marks]
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