Question

6. 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 leisure time enjoyed by households The loss of enjoyment people incur when scenic land is converted to commercial use The value of babysitting services, when the babysitter is paid in cash and the transaction isn't reported to the government Federal government paychecks to soldiers 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.

Answer 1

While calculating GDP, transactions that are not reported does not get counted in GDP. Also, there are also some transactions that are very difficult to quantified in terms of money and therefore these transactions are measured inaccurately in the GDP.

It is difficult to quantify in terms of money the value of leisure time enjoyed by the households and so it is generally measured accurately in the GDP.

Similarly, it is also difficult to measure accurately the loss of enjoyment people incur when scenic land is converted to commercial use and thus it is get measured inaccurately in the GDP.

Transactions not reported to government are not counted in GDP.

Thus,

The correct answer is the option (1), (2), and (3).

When a business import goods or services from abroad then such imports are termed as investment expenditure.

Since, these are imports, therefore, they will reduce the net exports (exports - imports) component of GDP.

When one component (investment) increases and other component (net exports) decreases then GDP remains unchanged.

So,

When a US company purchases and imports wood from Brazil to use to 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 wood from Brazil causes no overall change in US GDP.