Question

1. Which of the following are included and which are excluded in calculating this year’s GDP? Explain in each instance.

(a)       A homeowner who mows her own lawn

(b)       A decline in the average hours worked per week

(c)       Business expenditures on pollution control equipment

(d)       Income from illegal drug activities

(e)       The person who purchases a health care product

Answer 1

Y=C+I+G+(X-M)

EXCLUDED -(a) and (d)

are not included in the GDP calculation as a homeowner who owns her own land is not providing anything productive and is an unpaid work to the economy and income from illegal drug activities related to the underground economy and the reason they are not taken into consideration is that they go unreported and hence can distort the estimated GDP.

c

when a business is spending on pollution control equipment the business is investing in cleaner, greener technology hence its a form of investment which will be included in the calculation of GDP

e

an individual purchasing a health care product is inducing a consumption activity which is definitely included in the calculation of the GDP

b

labor productivity is the hourly output and helps in measuring the real GDP produced in an hour of labor, hence when there is a decline in the average hours of work, there is a decline in the labor productivity which affects the GDP as fall in production . Hence GDP per hours worked is a measure of  labor productivity