20: Suppose that in 2015, geologist discover large reserves of oil under the tun

Question

20: Suppose that in 2015, geologist discover large reserves of oil under the tundra in Alaska. These reserves have a market value estimated at $50 billion at current oil prices. Oil Companies spend $1 billion to hire workers and move and position equitment to begin exploratory pumping during that same year. In the process of loading some of the oil onto tankers at a port, one ompany accidentally spills some of the oil into a bay and by the end of the year pays $1 billion to other companies to clean it up. The oil spill kills thousands of birds, seals, and other wildlife.

The combined effect of these events on GDP for the year 2015 was

A. $52 billion

B. $51 billion

C. $1 billion

D. $2 billion

The loss in national welfare will:

A. lower GDP since it is a non-market transaction and thus is included in GDP.

B. lowe GDP since it is a market transaction and thus included in GDP.

C. not be reflected in GDP since it is a non-market transaction and thus is not included in GDP.

D. not be reflected in GDP since it is a market transcation and thus is not included in GDP.

Explanation / Answer

Change in GDP = Total value of goods and services (independent of cause) = $1 bn + $ 1bn.

Please note: In principle, GDP does NOT include those products consumers do not pay for (crude oil is not a finished good).

D. $2 billion = ANswer

2) National welfare is not a market transaction and hence it is not reflected in GDP.

Hence answer is:

C. not be reflected in GDP since it is a non-market transaction and thus is not included in GDP.

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