5. Limitations of GDP Although GDP is a reasonably good measure of a nation\'s o

Question

5. Limitations of GDP Although GDP is a reasonably good measure of a nation's output, it does not necessarily include all transactions and production for that nation Which of the following scenarios are either not accounted for or measured inaccurately by either the income or the expenditure methods of calculating GDP for the United States? Check all that apply The costs of overfishing and other overly intensive uses of resources Federal government paychecks to soldiers The value of babysitting services, when the babysitter is paid in cash and the transaction isn't reported to the government The variety of goods available to consumers When a U.S. company purchases and imports wood from Brazil to use to build new houses within the United States, this purchase increases the component of GDP while also net exports by the same amount. Therefore, the purchase of wood from Brazil causes in US GDP.

Explanation / Answer

Although GDP is a reasonably good measure of a nation's output, it does not necessarily include all transactions and production for that nation.

Which of the following scenarios are either not accounted for or measured inaccurately by either the income or the expenditure methods of calculating GDP for the United States? Check all that apply.

Correct Answer:-

Reason:- GDP does not account for off-the-books activities, such as babysitting, which add value to the economy but are not reported to the government. It also doesn't consider the enjoyment households experience as a result of the variety of goods available to consumers. Finally, GDP doesn't take into account the costs of overfishing and other overly intensive uses of resources. All of these, though important in measuring the true quality of life within a country, would be far too difficult to measure accurately.

Federal Government paycheck to soldiers are accounted for in GDP as government purchases.

Answer:- When a U.S. company purchases and imports woods from Brazil build new houses within the United States, this purchase increases the investment   component of GDP while also decreasing   net exports by the same amount. Therefore, the purchase of woods from Brazil causesno overall change   in US GDP

Reason:-

When a firm purchases a good or service from abroad, this purchase increases the investment component of GDP. Similarly, if this purchase was made by a household, then the consumption component of GDP would increase. If the purchase was made by the government, then the government purchases component of GDP would increase.

However, this transaction has a counterbalancing effect that shows up in the net exports component of GDP. Recall that net exports equal exports minus imports. Because foreign-made goods and services purchased by domestic parties (consumers, firms, and the government) are imports, their value is subtracted from exports and shows up in the GDP calculation as a debit entry (with a minus sign).

In this case, because an American company has purchased and imported woods, the investment component increases by the value of the woods. However, since the woods were imported from Brazil, net exports decreases by the same amount (the value of the woods). Although the investment and net exports components of GDP have changed, there is no overall change in GDP.

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