Question

1. For the following list, decide how each item affects the calculation of GDP for Macro States in 2015.

Please also justify your reasoning as part of your answer.

a. A new house is constructed in Macro States during 2015.

b. The government purchases new textbooks for the schools of Macro States during 2015.

c. Macro States sells 100,000 pounds of beef to Neverlandia during 2015.

d. Judy teaches Ellen’s children in exchange for Ellen driving the children’s carpool three days a week throughout 2015.

2. For the following list, what spending components of GDP (C, I, G, X or M) would each of the following transactions affect.

a. A family buys a new refrigerator.

b. Aunt Jane buys a new house.

c. Ford sells a Mustang from its inventory.

d. You buy a pizza.

e. The state of California repaves Highway 101.

f. Your parents buy a bottle of French wine. (Two answers).

g. Honda expands and creates a factory in Marysville, OH.

5. GDP does not include the value of used goods that are resold. Why would including such transactions make GDP a less informative measure of economic well-being?

6. A U.S. citizen buys a pair of shoes made in Italy. How do the U.S. national income accounts treat this transaction? (hint: what happens to our equation and to GDP?)

7. Which of the following transactions will be included in GDP for the United States? Circle responses. If no, please briefly explain why.

a. Coca - Cola builds a new bottling plant in the United States.

b. Delta sells one of its existing airplanes to Korean Air.

c. Ms. Moneybags buys an existing share of Disney stock.

d. A California winery produces a bottle of Chardonnay and sells it to a customer in Montreal, Canada.

e. An American buys a bottle of French perfume in Paris.

f. A book publisher produces too many copies of a new book; the books don’t sell this year, so the publisher adds the surplus books to inventories.

Answer 1

1.

a)

When a new home is constructed, the full sales price is not counted in GDP. Instead, only the value of the construction put in place is counted in GDP— when the construction is completed. Hence, it will increase the GDP by the amount of value of construction.

b.)

Buying of a new textbook will be counted in the GDP of that year and hence will increase the GDP.

c.)

This will increase the GDP as exports is increasing (GDP = C + I + G + X - M and X is increasing so the GDP).

d.)

No this will not be counted in the GDP as there is no market value of the services has been realized.

2.

a.)

Consumption ( C ) - Since buying a new refrigerator is a consumption expenditure.

b.)

Investment ( I ) - Since buying a new house is a capital expenditure.

c.)

Investment ( I) - Subtracted from the inventory investment.

d.)

Consumption ( C )

e.)

Govt. Expenditure ( G )

f.)

Consumption & Imports both will be affected.

g.)

Investment ( I ) - Expansion of a business.

5.)

GDP - Market value of all the final goods and services produced within a country during a given period of time.

When a goods get newly produced we calculate the market value of that good and add in our GDP. If that good suppose car is again resold next year there is no new good produced and since we have already added the market value of that good in previous year's GDP, adding again will result in over counting and hence will reflect a higher GDP this year than what would have been actually. Suppose no new good has been produced this year and only this transaction has happened, then it will show an increase in well being since GDP has increased but in reality people are still consuming have same no. of goods and services this year as last year and thus, false notion of increased well being.