Question

Which component of GDP will be affected by each of the following transactions involving General Motors? If you believe that a transaction will affect all of the components of GDP, briefly explain why.

a. you purchase a new Chevrolet Silverado pick up from a GM dealer.

b. You purchase a 2017 Chevrolet Silverado from a friend.

c. GM purchases door handles for the Silverado from an auto parts manufacturer in Indiana.

d. GM produces 1,000 Silverado‘s in a factory in Flint, Michigan, and ships them to a car dealer in Shanghai, China.

e. GM purchases new machine tools to use in its flint factory.

f. The state of Michigan builds a new highway to help improve access to GM’s Flint plant.

g. Buonanno Construction in Massachusetts purchases 10 Silverado’s to use and it’s homebuilding business.

Answer 1

As we know GDP=Consumption expenditure+investment expenditure+government expenditure+net exports.

Ans-1) It will be a part of GDP as it is Consumption expenditure.

Consumption expenditure- It refers to expenditure incurred by households and private non-profit institutions serving households on all type of consumer goods.

Ans-2) It will not be included in GDP as it is purchase of second hand goods.

Such expenditure has already been included when they were originally purchased. Such goods do not affect the current flow of goods and services.

Ans-3) It will not be included in GDP.

This is a type of expenditure on intermediate goods. It will be included in the value of final expenditure. If it is included again it will lead to double counting of expenditures.

Ans-4) It will be included in GDP as it is a part of GDP as net exports.

GM produces 1,000 Silverado‘s in a factory in Flint, Michigan, and ships them to a car dealer in Shanghai, China. They produce in flint and sending their goods to shanghai, so it net export expenditure.

Ans-5) It will be included in GDP as it is a part of GDP as investment expenditure.

It represents the expenditure incurred on acquiring goods for investment by the production units located within the domestic territory. It is a type of gross business fixed investment.

Ans-6) It will be included in GDP as it is a part of GDP as government expenditure.

Government expenditure- It refers to the expenditure incurred by general government on various administrative services like defence, law and order etc. Government produces goods and services with the aim of social welfare without any intention of earning profits.

Ans-7) It will be not be included in GDP.