Question

1. Norman is a 70 year old retired worker. Last year he received social security payment of $20,000. To downsize, he sold his 40 year old house for $240,000 and bought a brand new apartment for $160,000. He paid $4000 to his real estate agent. He also sold some of his stock holdings and earned $15,000. He had to pay $1000 to his stockbroker as commission.

1. What was Norman’s contributions to the GDP last year?

2. Explain why/how you get your answer.

Answer 1

Let us first calculate his all incoming cash flows

1. Social security payment. $20,000

2. Sale of house. $2,40,000

3. Sale of stock holdings. $15,000

Total. $ 2,75,000

Calculation of all his spending

1. Purchase of apartment. $1,60,000

2. Payment to Real estate agent. $4,000

Total. $1,64,000

From the above, following conclusions can be drawn

(a) Norman's contributions to GDP last year

His contributions to GDP. = His Consumption i.e., $1,64,000.

(b) From the total receipts of cash flows of $2,75,000, he spent a total amount to the extent of $1,64,000 and balance amount of $1,11,000 remains idle in his pocket and hence his contributions to GDP equals his spending made.