1. GDP is defined as the market value of all final goods and services produced w
ID: 1190007 • Letter: 1
Question
1. GDP is defined as the market value of all final goods and services produced within a country in a given period of time. In spite of this definition, some production is left out of GDP. Explain why some final goods and services are not included.
2. Try to explain why it is the case that the value of intermediate goods produced and sold during the year is not included directly as part of GDP, but the value of intermediate goods produced and not (yet) sold as of the end of the year IS included directly as part of that year’s GDP.
3. Since it is counted as investment, why doesn't the purchase of earthmoving equipment from China by a U.S. corporation increase U.S. GDP?
4. Identify the immediate effect of each of the following events on U.S. GDP and its components.
a. James receives a social security check.
b. John buys an Italian sports car.
c. John buys domestically produced tools for his construction company
5. You find that your paycheck for the year is higher this year than last. Does that mean that your real income has increased? Explain carefully.
6. U.S. real GDP is substantially higher today than it was 60 years ago. What does this tell us, and what does it not tell us, about the well-being of U.S. residents?
Explanation / Answer
1. GDP is defined as the market value of all final goods and services produced within a country in a given period of time. In spite of this definition, some production is left out of GDP. Explain why some final goods and services are not included.
Some final goods and services are not inlcuded in GDP since it is very difficult to calculate such goods and services. Such as service provided by housewife at home generally is not included in GDP caculation.
2. Try to explain why it is the case that the value of intermediate goods produced and sold during the year is not included directly as part of GDP, but the value of intermediate goods produced and not (yet) sold as of the end of the year IS included directly as part of that year’s GDP.
Including intermediate goods would lead to the double counting while including stock at the end of the year does not cause the double accounting problem.
3. Since it is counted as investment, why doesn't the purchase of earthmoving equipment from China by a U.S. corporation increase U.S. GDP?
Because money flow out of USA
4. Identify the immediate effect of each of the following events on U.S. GDP and its components.
a. James receives a social security check.
it will not impact GDP since it is only transfer payment.
b. John buys an Italian sports car.
It has increased GDP of country.
c. John buys domestically produced tools for his construction company
it also increased GDP of country
5. You find that your paycheck for the year is higher this year than last. Does that mean that your real income has increased? Explain carefully.
Now we can not pay if our real income has increased until we have data on inflation
6. U.S. real GDP is substantially higher today than it was 60 years ago. What does this tell us, and what does it not tell us, about the well-being of U.S. residents?
Yes generally it estimated higher GDP means more goods and services flow in the country, but here we also have to look at the population and distribution of income in society.
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