Question

ABC Inc. has constructed a new house under its business name for business purpose. Next to that Mr. D has also built a new house for living with his family. How these two actions will affect the GDP of the economy? Explain.

300 words

Answer 1

Both these activities will increase the GDP by the amount of transaction. To explain it, we will use Expenditure method of GDP.

The most widely used method to calculate GDP is expenditure method. This method aims to collect data on expenditure side by adding household spending, government spending, business investment and Net exports. Here we do not include expenditure on sale and purchase of second hand goods, as these transactions are not included in GDP.

GDP by Expenditure Method = personal consumption Expenditure + Gross Investment + Government Spending + Net Exports (Export - Import)

ABC construction of new factory and new house build will be recorded in "Gross investment " component of GDP. The investment component includes Machinery, equipment, Buildings, land and purchase of Houses, changes in inventory that result in asset creation. Financial and capital market transactions are not part of investments.

Let value of each new factory be 30 Million $ and new house build be 2 Million $. Rest all components of GDP in previous year and this years are same, the GDP will increase by the value of increase in Gross investment

GDP in previous year = personal consumption Expenditure(600) + Gross Investment(100) + Government Spending (200)+ Net Exports (Export - Import)(20)

= 600 + 100 + 200 + 20 = 920 Million $

GDP in current year = personal consumption Expenditure(600) + Gross Investment(100 + 30 + 2) + Government(200) Spending + Net Exports (Export - Import)(20)

= 600 + 132 + 200 + 20

= 952 million $.