1. Analyze each of the following activities and explain if they would be counted in the...

1. Analyze each of the following activities and explain if they would be counted in the GDP, and why or why not:

a. deterioration of the water quality in the Atlantic Ocean,

b. the purchase of a new automobile,

c. services provided free of charge by a homemaker,

d. the production and sale of illegal drugs,

e. the purchase of 100 shares of American Airlines stock,

f. the installation of airbags in every automobile.

Expert Solution

a) It will not be included in the GDP. (Unfortunately, we don't calculate the pollution created by us in the GDP. GDP only calculated the new products made and value additions. pollution of Atlantic ocean is not one of them. )

b) A purchase of a new Automobile will be calculated in the GDP. It is related to creation and selling of a new product.

c) Service provided for free are not calculated in the GDP. TO be calculated in the GDP the service should involve any monetary exchange, in this case, there is no economic value of service provided i.e. no monetary transaction. Another example of such services is a homemaker working at her own house for free, mother care for the child, community service etc.

d) Illegal drugs are not included in the GDP. Anything illegal is never included in the GDP like illegal arms trade, drugs, trafficking etc. As GDP includes only the market value the good which doesn't pass through the proper market channel are not included in GDP.

e) Stocks, government securities, social security, welfare payments are not included in the GDP. The only transaction that creates a new goods stocks are sold and resold in the market changing hands similarly a bike sold again will not be a part of GDP.

f) No, installation of airbags in the Automobiles will not be included in the GDP. They are part of a finished good that is the Car. When the car is sold the value of Airbags will be included in it. Intermediate goods do not form part of GDP.

Rahul Sunny answered 2 years ago

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