Transaction Time frame Cost Parts sold to washing machine producer Fall 2018 $500 in parts Factor...

Transaction	Time frame	Cost
Parts sold to washing machine producer	Fall 2018	$500 in parts
Factor labor leads to washing machine	Winter 2018	$425 in labor
Home Depot buys washing machine	Spring 2019	$1,000 for the car
Home Depot sells washing machine to customer	Summer 2019	$1,250 for the car

Using the information in the table above, describe two different ways the transactions could contribute to GDP for both years. Which way is used in practice? Be sure to provide a thorough explanation, including all calculations and define any words used in the explanation.

Solutions

Expert Solution

The two ways to calculate GDP are Value Added Method and Income Method.

VALUE ADDED METHOD:

This method calculates national income by adding value to a product at every stage of its production. The value added method is also known as production method.

The transaction involving Parts sold to washing machine producer (Fall 2018) and Home Depot buys washing machine (Spring 2019) will be a part of Value Added Method. The part of washing machine will be added to calculate the final value of the product whereas home depot buying washing machine will be the final value of the product.

INCOME METHOD :

The National income by income method is calculated by adding up the wages, interest earned on capital, profits earned, rent obtained from land and income generated by self-employed in an economy. It is known as Net Domestic Product at Factor Cost.

The transaction involving Factor labor leads to washing machine (Winter 2018) and Profit of Home Depot selling washing machine to customer [$1,250-$1,000= $250] (Summer 2019). The cost of factor labour will account as wages so it will added to the GDP while calculating. On the other hand, the profit earned after selling machine will be added to the GDP as its an additional value to the economy whereas the value of machine cannot be added due to double counting.

Both the methods are used in calculating GDP as they would give the same amount as the answer for a particular year.

Value Added Method = Income Method = Expenditure Method

Rahul Sunny answered 1 year ago

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