Question

“A working mother receives $300,000 salary, while spends $30,000 for hiring baby-sitter.” What's the impact on GDP?

The answer is +$330,000, and my question is wouldn't it be double counted? The wage of the baby sitter is transferred from the mother's salary.

Answer 1

Here we will understand concept by two methods for Calculation of GDP. These are -

1. Expenditure method - 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 investent and Net exports.

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

2. Income method - In income method, we add all income that is generated by production of goods and services and by Businesses ie(land, labour, capital & profit)

GDP by income method = Compensation to Employees (wages & salaries) + Business profits + rental & interest income

“A working mother receives $300,000 salary, while spends $30,000 for hiring baby-sitter.” What's the impact on GDP?

There will be no double counting here because the 30000 $ paid by mother for hiring baby sitter is recorded in Expenditure side of GDP as payment made for the service of baby sitter under head "Consumption". Thus 30000 $ extra will not be recorded in salary in Income method of GDP. IT will bre recorded as payment for consuming service of Baby sitter.

Baby sitter do have got the money in form of salary, and the question arises it should be recorded in "compensation to employees" head only. But the reality is that it is paid by Mother as service cost and is distributed to Baby sitter in form of mother's consumption of service of baby sitter. Therefore we avoided the double counting at all.

In "Consumption" head of GDP we included spending on "durable goods", "Non durable goods" & "services". Payment made to Baby sitter is recorded in "Services"

Now Suppose all GDP items are zero except consumption and compensation to employes (and we assume that all money is spend in the economy )

GDP by Expenditure Method = Household consumption + Gross Business Investment + Government Spending + Net Exports

= 30000(paid for baby sitter service) + 270000 (other household consumption by mother on durable and non durable goods) + 0 + 0 + 0

GDP = 300000 $

again, in Income method

= Compensation to Employees (wages & salaries) + Business profits + rental & interest income

= 300000 + 0 + 0

GDP = 300000 $

I hope u have understood (U can comment for doubt)