Question

For each of the following scenarios, explain how things are included or excluded from being counted in GDP:

1. You get a new XBOX-1 gaming system at Best Buy last year and sell it on Facebook marketplace this year
2. You buy a new digital textbook for your macroeconomics course
3. You and your realtor find a fully renovated historic home that you purchase
4. Newly produced leather that is used for automobile seats
5. Your friend buys a 2020 certified pre-owned Toyota
6. Your neighbor purchases a new snow plow for his 2010 pickup truck
7. A construction firm trades in a used bulldozer for a new one; the used bulldozer is sold to another firm.

2. GDP (also known as "Y") is made up of 4 components:

• G - Government spending
• I - Investment
• C- Consumption
• XN - Net exports

Which component are each of the following included in? Label each one.

1. A newly built condominium on Miami Beach
2. Specialty cheeses imported from Italy
3. Your new pumpkin spice Yankee candle
4. Your automobile registration renewal from the DMV

3.  Suppose C = 600, I = 250, G = 150, and X = 0

1. What is gross domestic product (GDP)?
2. Calculate each component’s share of GDP.
3. Suppose government spending increases to 200, but the other components of GDP do not change. What is government spending’s share of GDP now? What is the new non-government share?
4. Suppose that the level of potential GDP (Y*) is 1000 and is unaffected by the increase in government spending described previously. Without doing any calculations, explain in general terms what happens to C/Y*, X/Y*, and I/Y* after the government spending increase in (b).

Answer 1

1. A new XBOX-1 gaming system bought at Best Buy last year was included in the GDP last year so now if you sell it , it is a second hand good , and thus will be excluded in GDP this year.

2. A new digital textbook for macroeconomic course will be included in the GDP this year since it is a new final good purchased in this year and comes under personal final consumption expenditure.

3. On the purchase of the historic house , we know it was built not in the current year but far before that and thus it's value is excluded from GDP. However, the commission/ brokerage that you provide to your realtor on purchase of the house is included in the calculation of GDP since it is his income in the current year for his productive services.

4. Newly produced leather which is used for automobile seats is excluded from the GDP since it is an intermediate good and the expenditure on it will already be included in the final good's expenditure.

5. Since a 2020 certified pre owned Toyota is a used car and thus not bought for the first time by your friend, then it's purchase will be excluded from current year's GDP since it was already included in the year it was originally purchased in.

6. The purchase of a new snow plow for a 2010 pickup truck will be included in the GDP this year since it is a new addition for his old asset and is included in capital formation in the expenditure method.

7. The purchase of a new bulldozer will be included in the GDP for the current year since it has been purchased in the current year, however the sale of the old bulldozer to another firm will be excluded from GDP since it is a second hand good and it's value was already included in GDP when it was first bought.