Question

Which of the following would NOT be considered a component of GDP using the expenditure approach?
Select the correct answer below:
A Japanese car company builds a factory in Detroit.
An American car company builds a factory in Tijuana, Mexico.
The government invests in new infrastructure.
Joe spends $5 buying a hamburger at McDonald's.

Answer 1

Let's first understand what is GDP.

GDP is Gross Domestic Product which can be defined as the monetary value of all the finished goods and services produced within a country's borders in a specific time period.

Standard formula for GDP is GDP= C + I + G + (X-M)

C- Consumption of final goods and services produced within the country

I- Investments like investment in new houses, new mine

G- is the sum of government expenditures on final goods and services. It includes salaries of public servants, purchases of weapons for the military and any investment expenditure by a government.

X-Exports M-Imports

Now we will see list of items that are excluded from GDP

1 Financial Transactions (buying stocks, bonds)

2 Transfer payments (receiving welfare check)

3 Secondhand Sales

4 Overseas Production (US owned firm in India)

5 Nonmarket Transaction ( Fixing your own car)

6 Illegal Transactions

7 Unreported Transaction ( Tipping a waiter)

8 Intermediate Goods ( Steel purchased by car company)

By understanding the list of exclusion we can conclude that in above options First two options will not be part of GDP because here we see when a japanese and american car companies are building a factory in Detroit or Mexico, by doing this they are contributing to the GDP of USA and Mexico and not to the GDP of Japan and USA because they are not building a business in their own country. Goods produced ouotside USA and Japan will not be counted as part of the their GDP. While other two option are part of GDP because here the government is investing in new infrastructure so this factor is very much included and the other component where Joe spends a money on hamburger which is final good and is consumed by a consumer is part of GDP hence First two components aren't part of GDP.