Question

A retail store specializing in home-appliances acquires a refrigerator from a domestic producer: the transaction costs 400€, and the shop pays it in full amount on December 15, 2017.

A client buys the refrigerator on January 5, 2018 for the total sum of 500€.

What is an impact on GDP of year 2017 of these transactions?

How is a purchase of refrigerator accounted for in the national accounts (GDP) of 2017?

What is an impact on GDP of year 2018 of these transactions?

How is a purchase of refrigerator accounted for in the national accounts (GDP) of 2018?

Answer 1

Part-1

According to the Production Approach of calculating GDP:-

Total goods and services produced including all types of activities at market prices-Total intermediary consumption to produce the goods and services

or,in other words

Total GDP at market prices= GDP of goods and services at market prices+Any taxes on those goods and services-subsidies on those goods and services

In this case, we can consider the 400 Euro transaction cost as the intermediary cost or the intermdiary consumption to acquire or produce the refrigerator. Thus to find out the impact of this refrigerator purchase we have to know the market price at which the retail store has acquired the refrigerator from the domestic producer including all the additional taxes on that purchase and then deduct the transction cost as intermediary consumption as shown above under Production Approach.

Part-2

If we implement the Production Approach to account for this refrigerator purchase into the GDP calculation of 2017,we obtain:-

Total GDP at Market Price(2017)= GDP of the refrigerator at market price (the price at which the retail store purchased from domestic producer) + Any taxe/s paid on the purchase (any additional taxes such as sales tax or service etc. paid by the store on the refrigerator purchase)- 400 Euro (Transaction cost considered as part of the intermediary cost to acquire/produce the refrigerator)

Special Note: To calculate the Real GDP of 2017 we have to consider a base year and adjust for the inflation.

Part-3

Now the refrigerator is further purchased by a client at 500 Euro from the retail store. Thus, the retail store makes a revenue of 500 Euro but it has already paid the transaction cost of 400 Euro making a net profit of 100 Euro. Now if we consider this transaction cost of 400 Euro in the GDP calculation of 2018 it will be Double Counting as we have already included it in the GDP calculation of 2017.

Therefore, we can add this extra revenue of 500 Euro including any extra sales tax, service tax paid by the client with whatever result we obtain for Total GDP of 2017 which indicates that GDP is further increased due to this extra reveue generation in 2018 by the retail store if we remain consistent with the production method.

Special Note: We have to further deduct any extra tax, cost,maintenanc charge, expenditure, expenses etc that might be associated with the selling of this refrigerator that the retail store has to pay (Always Remember to deduct the intermediary cost/consumption of producing any goods or services according to Production Method)

Part-4

Again, based on Production Method we can actually calculate the GDP of 2018 as affected by the final purchase of the refrigerator.

Total GDP at market price (2018)= 500 Euro (Market Price of the refrigerator bought by client)+Any taxe/s paid on the purchase (any additional taxes such as sales tax or service etc. paid by the client on the refrigerator purchase)- Any intermediary cost/consumption to acquire/produce the refrigerator apart from the previous transaction cost of 400 Euro to avoid Double Counting

Special Note: Same as before, we have to consider a base year to derive Real GDP anad adjust for inflation.