Question

Grab a blank sheet of paper and try some GDP analysis on your own. Take a picture or scan your sheet, and upload it after you are finished. This contributes to your participation grade in the class.

1. Because it is counted as investment, why doesn't the purchase of earthmoving equipment from China by a U.S. corporation increase U.S. GDP?
2. Identify the immediate effect of each of the following events on U.S. GDP and its components:
   • James receives a Social Security check.
   • John buys an Italian sports car.
   • Henry buys domestically produced tools for his construction company.

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Answer 1

1. Only net exports ( Exports- imports) are included in GDP. GDP consists of final value of goods and services produced within the borders of a country in a given year. The purchase of earthmoving equipment from China by a U.S. corporation is an import and cannot be included in GDP.

2. Social security checks are transfer payments from the government to individuals and does not creaste economic value. It is not included in GDP.

3. Consumption will increase and imports will increase. Only net exports are included in GDP. So this cancel out and there will be no change in GDP.

4. Purchase of tools are business investment so the investment component of GDP will increase. Included in GDP.