Question

What component/components of GDP, if any, would each of the following transactions affect and how is it affected?

Chose One: consumption, investment, government spending, net exports or none

Choose One: increasing, decreasing, or none

1. Your family buys a new refrigerator.
2. Aunt Jane buys a new house.
3. Art sells his 1965 Mustang.
4. California re-paves Highway 101.
5. Toyota expands its factory in Princeton, Indiana.
6. Jim buys recreational marijuana from a dealer in Phoenix.

Answer 1

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New Refrigerator: consumption; increasing

The buying indicates consumption spending. Consumption increases. Since consumption is an element of GDP, it increases GDP too.

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New House: consumption; increasing

Although it looks like an investment, it should not be considered as investment because such investment can’t create job opportunity, or production facility. The house is assumed to be used for personal purpose; therefore, it is consumption.

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Mustang: none; none

This is not a GDP of this year, since it comes from old inventory. It was already treated as GDP in the year of production.

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Re-paves: investment; increasing

This creates job opportunity for so many labors and contractors. Therefore, this is an investment and it increases GDP.

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Expanding: investment; increasing

This is also an employment opportunity and production facility. Therefore, investment is there that increases GDP.

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Recreational: consumption; increasing

The purchase is done within the US; therefore, this is not an import. This is consumption, since it is used for personal purpose. As it is purchased, GDP increases.