Question

 Explain whether or not each of the following transactions would be included in GDP for 2019. If yes.

 state which expenditure category it would be included in, if no, explain why not.

 (a) (2 points) In 2019, the Smith family purchases a new house that was built in 2019.

 (b) (2 points) In 2019, the Jones family purchases a house that was built in 2001.

 (c) (2 points) In 2019, a construction company purchases windows to put in the Smith family home

 that was built in 2019.

 (d) (2 points) In 2019. Mr. Jones paints all of the rooms of the Jones family house purchased in 2009, using paint and supplies purchased in 2019.

 (e) (2 points) In 2019, Mr. Smith uses an online brokerage service to purchases shares of stock in a construction company.

Answer 1

1. Yes, this is counted in Residential Fixed Investment component of 2019 GDP.

2. No, this would count in Inventory Investment for 2001. This is because the income (of architects, construction workers, profits in selling construction supplies etc) corresponding to the output (1 residential unit) was created back in 2001;

resale of the property creates no new income, only capital appreciation-type profit for the previous owner.

3. Yes, this is counted under Non-Residential Fixed Investment for 2019 GDP: Expenditures by firms on capital such as commercial real estate, tools, machinery, and factories.

This as opposed to Residential Investment which is expenditures on residential equipment that is owned by landlords and rented to tenants - the construction company doesnt cater to the rental tenant but rather the buying landlord.

4. Yes, this is counted under Residential Fixed Investment for 2019 GDP. This is because Mr Jones is the landlord and getting the place painted could be seen as an investment to command better monthly rates when renting the place to a tenant. Income is obtained if he rents it out to others; or if he resides there, it is considered as him renting it to himself.

5. No, shares and debentures are not included in the calculation of GDP.

To begin, imagine you you have invested 100 dollars in the stock or debenture issued by a company A. This amount will be utilised by the company in purchasing the required machinery.

Now while calculating GDP, the company A would have shown $100 as investment towards purchasing machinery. If $100 invested by you is also considered as an investment then it would amount to counting of the same money twice in the investment for the same single product (the machinery brought in this case).