Question

You just received an unexpected gift of $10,000 from a long lost relative. After some consideration, you must decide what you will do with all of this extra money. How much of the $10,000 will you spend? How much will you save? Explain how your decision will impact GDP.

Answer 1

GDP is the total monetary values of all finished goods and services that is produced within the country during a specific time period.

GDP = Consumption + Investment + Government saving + Net export

A fundamental macroeconomic accounting identity is that saving equals investment. When saving increase investment increase and vice-versa. A higher than before savings will be translated to greater production of capital goods and vice-versa. In the GDP calculation consumption and investment play an important role and consumption contribute for more than 60% in GDP calculation.

Now we come on the question: i  just received an unexpected gift of $10,000 from a long lost relative. I will spend $5000 on buying/purchasing of new mobile phone and TV and rest $5000 i will save. We have seen that saving equals investment so, rest $5000 will convert into investment. So, it will increase GDP because here consumption and investment increase. All the amount of $10000 will contribute in the GDP calculation. Now suppose i spend $3000 on buying old TV from my friend then only $7000 will contribute in GDP calculation. The buying and selling of old or second hand products do not consider for GDP calculation.