Question 2. Identify the immediate effect of each of the following events on its

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Question 2. Identify the immediate effect of each of the following events on its components in 2017- (30 points in total; 5 points for each part [a] John buys a German sports car in 2017. [b]Henry, a business owner in Utah, buys domestically produced tools for his construction company in 2017. [c] Alice buys a used Ford Mustang from a local dealer and pays the dealer s8,000. The Ford Mustang was produced in 2010 in Detroit, MI. [d] Apple produces about $1 billion worth of iPhones, iPads and Mac computers in China in 2017. [el FoxConn, a manufacturer from Taiwan, builds a $3 billion factory in Wisconsin in 2017. [f] The state government of Utah increased public education funding by over $300 million in 2017.

Explanation / Answer

a) This is a case of import. Since John spends on foreign products it would lead to a trade deficit (or decrease in net exports)– therefore, GDP would decrease.

b) Buying domestically produced tools would increase the GDP (as it would increase the gross domestic demand).

c) No impact on GDP as the Ford Mustang was produced in 2010. So as to avoid double counting, the transaction price of used car is excluded from GDP calculations.

d) No impact on GDP as the production is happening outside US.

e) GDP increases as Foxconn builds a factory in Wisconsin. The contruction of factory would require local materials and labour and would thus boost demand in the US.

f) Public spending by the Government leads to a rise in aggregate demand (domestic). Therefore, the GDP would increase.

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