ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -While the graph is not incorrect, it is important to keep in mind that, when calculating GDP, the value of imports is actually subtracted from the other components of GDP (personal consumption expenditures, gross private domestic investment, government consumption expenditures, and gross investment), not exports.

Detailed explanation-2: -As such, the value of imports must be subtracted to ensure that only spending on domestic goods is measured in GDP.

Detailed explanation-3: -The GDP calculation accounts for spending on both exports and imports. Thus, a country’s GDP is the total of consumer spending (C) plus business investment (I) and government spending (G), plus net exports, which is total exports minus total imports (X – M).

Detailed explanation-4: -GDP = C + I + G + X – M I = Investment expenditure. G = Government expenditure. X = Total exports. M = Total imports.

Detailed explanation-5: -Answer and Explanation: The amount spent on imports has to be subtracted from the GDP when the expenditure approach is used. This is because the amount spent on imports is not on goods and services produced by the country’s own firms. It is the amount spent on goods and services produced in other countries.