Question

In: Economics

Discuss which of the following fall into the categories of consumption, investment, government expenditure and net...

Discuss which of the following fall into the categories of consumption, investment, government expenditure and net exports from the Y = C + I + G + NX (X – M) identity, and whether the impact is to increase or decrease GDP.

(a) Charles buys a second-hand textbook from Tim.

(b) When Charles bought the book, he paid Sarah $10 to collect it from Tim.

(c) Thomas buys a new house

(d) Your firm sells meat to Indonesia

(e) The fish and chips shop down the road buys fish to make meals for diners.

(f) The same shop buys a deep fryer to fry fish for meals.

Solutions

Expert Solution

GDP is the sum total of the market value of final goods and services produced in a country during a particular period of time.

GDP by Expenditure Method = Consumption (C) +Investment (I) + Government Purchases (G) + Net Exports (NX).

Net Exports = Exports (X) - Imports (M)

Part a

This transaction will not be included in GDP. GDP includes only final goods and services. Secondhand textboooks would have been included in the GDP of the year in which it has been produced and sold. Counting it again will result into double counting.

Part b

Due to this transaction Consumption increases by $10. Charles has utilized the service of Sarah. The service is that Sarah has to collect the book from Tim. The service associated with the collection of secondhand book will be included under Consumption "C" while calculating GDP.

Part c

With this Investment ie "I" will increase. Purchase of new house is considered as Investment. The GDP will increase with the increase in "I" Component.

Part d

With these Exports "X" will increase.Selling meat outside home country is considered as Exports. Finally it will become part of Net Exports represented by NX. Net Exports, NX = Exports, X - Imports , M.

Part e

This transaction will not effect the GDP. Fish and chips are considered as Intermediate Goods. The final good is meals which will be served as dinner. GDP only includes final goods and services. GDP will neither increase nor decrease.

Part f

Due to this transaction Investment, "I" will increase. Buying of deep fryer will be considered as Investment. Deep fryer will smooth the operations of shop as it will help in frying fish for meals.

Rahul Sunny answered 1 year ago
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