Why does equilibrium real GDP occur where C + Ig = GDP in a private closed economy? What happens to real GDP when C + Ig exceeds GDP? When C + Ig is less than GDP? What two expenditure components of real GDP are purposely excluded in a private closed economy?

Answer:

(a) The GDP equation is

Y = C + I + G + NX

In a private economy, Government is absent & Government spending (G) is zero.

In a closed economy, Net exports (NX) is zero.

So, in a private closed economy, G = NX = 0

Therefore, Y (GDP) = C + I

(b)

If C + I > GDP, this means that actual demand is more than planned aggregate demand. This takes place during economic growth and leads to an inflationary gap when demand exceeds available output, driving up the prices.

(c) If C + I < GDP, actual demand is less than planned aggregate demand. This takes place during economic slowdown & recession and leads to a deflationary gap when demand falls short of available output, reducing the price level.

(d)

As mentioned in part (a), the two components of GDP excluded in a private closed economy are Government Spending (G) and Net Exports (NX).