By how much does GDP rise in each of the following scenarios? Briefly explain fo
ID: 1094434 • Letter: B
Question
By how much does GDP rise in each of the following scenarios? Briefly explain for each.
a) You spend $5,000 on college tuition this semester.
b) You buy a used car from a friend for $2,500.
c) The government spends $100 million to build a dam.
d) Foreign graduate students work as TAs at the local university and earn $5,000
each.
e) A computer company buys parts from a local distributor for $1 million,
assembles the parts, and sells the computers for $2 million.
f) A real estate agent sells a house for $200,000 that the previous owners had
bought 10 years earlier for $100,000. The agent earns a commission of $6,000.
g) During a recession, the government raises unemployment benefits by $100
million.
h) A US airline purchases and imports $50 million worth of airplanes from the
European company Airbus.
Explanation / Answer
Gross Domestic Product or GDP measure the value of all final goods and services produced within the country during a given time period (usually current year). The componentsof GDP are Consumption, investment, government spending and net export. Net export is export of goods and services minus imports of goods and services.
1. Spending in collage tution in current semester is investment in human capital. Thus, counted in GDP. The GDP will increase by $5000.
2. Used cars are not final product of current period, thus not counted in GDP.
3. Building a dam increases government spending, thus, counted in GDP. The GDP increases by $100 million.
4. Foreign graduate export their services and the collage imports the service. The imports causes reduction in GDP by $5000 times of number of foreign students who offers the service.
5. The GDP only take into accounts the buying and selling of final product to avoind double counting. Thus the price of assebled computer counted in GDP. GDP increases by $2 million.
6. The house is not build in current year. So the price of house is not counted in current GDP. The service of the agent is provided in current year. So his commision is counted in GDP, GDP increases by $6,000.
7. The increase in unemploymnet benefit in current year increases government spending. The GDP increases by $100 million.
8. The import of an airbus in current period is a negative item of GDP. The GDP decreases by the price of airbus. The gDP decreases by $50 million.
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