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- The purchase of earthmoving equipment by US company , results in the increase in the investment , but also it will be counted as Import , because it is purchased from China , hence on one side Investment will raise GDP and Import will drop it by same amount. Hence there will be no overall impact on GDP

2 - Social security payments are part of transfer payment and do not contribute to any production of item as an immediate effect. Hence they are not included in GDP.

3 - This will have no impact on GDP because on one side , consumption expenditure will rise as new sports car has been purchased , but imports will also rise as it is an italian car. So GDP will not change.

4 - As the tools are bought from domestic company , this will lead to rise in investment and hence increase the GDP of economy.