Define Gross Domestic Product (GDP). What are the two approaches or ways to meas

Question

Define Gross Domestic Product (GDP). What are the two approaches or ways to measure GDP ? Explain carefully and write the equations for each.

Which components of GDP (if any) would each of the following transactions affect. Explain carefully in each instance

(a) A family buys a new refrigerator

(b) You buy a new residential house

(c) The Ford Motor company sells its ‘Fusion’ brand car from its inventory

(d) You buy a Domino’s Pizza

(e) South Carolina re-paves its Highway 385

(f) You buy a bottle of French Wine at the Publix Store

(g) Honda expands its factory in Marysville, Ohio

(h) You buy a BMW X3 produced in Greer, South Carolina

Suppose that a farmer sells wheat to a baker for $10. The baker uses the wheat and makes bread loaves and sells them for $15. What is the total contribution of these transactions to GDP?

How would each of the following transactions affect GDP in the US ? Explain carefully in each instance.

(a) The US government pays $1 billion in salaries to government workers

(b) The US government pays $1 billion to social security recipients

(c) The US government pays $1 billion to a US firm for newly produced airplane parts

(d) The US government pays $1 billion to US banks as interests held on an asset class of bonds

(e) The US government pays $1 billion to Saudi Arabia for crude oil that it adds to its oil

Reserves

Which would contributes more to US GDP in any given year, the production of fuel- economy cars, or the production of luxury cars ? Explain carefully.

9. In class we stated that GDP growth in the US was 0.6% in the first quarter of 2015 and 3.9% in the second quarter of 2015. These numbers are also stated on the Bureau of Economic Analysis website, (bea.gov). If you go the main page, in the center section under National, click on Gross Domestic Product, and at the top, new release.

(a) Now obtain the relevant and necessary numbers from the BEA website and calculate (1) the economic growth in Quarter I and (2) the economic growth in Quarter II. Show all your work and formulas used, and in the process confirm the rates of 0.6% and 3.9% respectively.

(b) From the BEA website, find the figures during the 2nd quarter of 2015 for the 4 main components of the most recent Real GDP figures using the expenditure approach. What percentage is each of total GDP for the US. Show all your calculations.

(c) Which of these components grew the most during the 2nd quarter of GDP ? Show your calculation for the rest as well, and rank the other three in descending order.

Suppose an economy produces 1 million cars, priced at $15,000 each in the year 2015. Of these suppose 700,000 are sold to consumers, 200,000 are sold to firms, 50,000 sold to the government and 25,000 are sold abroad, in this same year. Assume that imports are zero.

(a) Calculate GDP for the economy based on the market value of production.

(b) Now calculate GDP based on the expenditure approach.

(c) Are your answers from (a) and (b) the same ? Note: They should be.

Explanation / Answer

Gross Domestic Poduct (GDP) is defined as an aggregate measure of production equal to the sum of the gross values added of all residents, institutional units engaged in production (plus any taxes and minus any subsidieson products not included in the value of their outputs).

GDP can be measured by two ways, viz. production approach and income approach.

Production approach sums the output of every class of enterpriseto arrive at the total during a particular time period.Value of each good or service is derived by multiplying the quantitiesof that commodity or service produced with its existing price. If X1, X2,..., Xn are the commodities produced by the quantities, x1, x2,..., xn and their respective prices are P1, P2,..., Pn, then the GDP is P1x1 + P2x2 + ... + Pnxn = i=1n Pixi.

Income method sums the primary incomes distributed by resident producer units during a particular time period. If the factor incomes (where the basic factoors are land, labour, capital and organisation) are added up, then the aggregate value gives the GDP, i.e., GDP = rent + wage + interest + profit. But in this calculation transfer earnings or payments which are not accrued from any productive process, such as, charities or pension and capital gains from any asset selling should be excluded.

Therefore GDP (Y) = Consumption (C) + Saving (S) = C + Investment (I) + Government expenditure (G) + Exports (X) + Imports (M)

(a) When a family buys a new refrigerator it affects the Consumption component of GDP as the refrigerator is consumed by the family.

(b) When I buy a new residential house investment component is affected as spending on new asset is considered as investment.

(c) This will affect consumption component as the buyer of the car consumes it.

(d) It will affect consumption component as the pizz will be consumed by me.

(e) This will affect the government expenditure component as construction of highways and roads are done by the government.

(f) It will affect consumption component as the wine will be consumed by me.

(g) This will affect investment component as the new factory will be considered as business investment in eqipment.

(h) It will affect consumption component as the car will be consumed by me.

The total contibution of these transactions in GDP is $15 because if only final good are considered then the Bread loves are sold for $15. Again if primary goods are considered then wheat is sold for $10 and this value is added with the bread loves which is sold for $15, so actual value of bread loves is $15 - $10 = $5. Therefor, contribution in GDP in this case is also $10 + $5 = $15.

(a) In this case GDP will increase as the salaries to the workers will be their incomes which in turn will increase the income of the country.

(b) In this case GDP will not change as no goods or services are produced.

(c) In this case GDP will increase as the payment by the government will increase the income of the firm which in turn will be an added income to the GDP.

(d) In this case GDP will not change as transfer payments or receipts are not calculated in GDP.

(e) In this case GDP will not change as the payment has been made to other country.

Since cost of production for luxury cars is more so it will be sold at a higher selling price than the fuel-economy cars hence apparently it will contribute more to GDP but in the question the number of fuel-economy cars and luxury cars produced and sold is not given so we cannot judge it from this question.

9. Data not found from website.

Second part:

(a) GDP based on market value of production = $15000*(700000 + 200000 + 50000 + 25000) = $14625000000

(b) GDP based on expenditure method = $(15000*900000) + $ (15000*50000) + $(15000*25000) = $(13500000000 + 750000000 + 375000000) = 14625000000

(c) Yes, I have got same answer.

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