Question

There are three ways of calculating a nation’s GDP:

(1) Output method; (2) Income method; (3) Expenditure method. Which of the following activities are reflected in the national income and product accounts and in which categories/sub-categories? How much does each activity change real GDP? Give a brief explanation for your answer in each case (a few words will do.)

a) Smith pays a carpenter $8,000 to build a garage.

b) Smith purchases $2,000 worth of materials and builds a garage herself, which adds $8,000 to the value of her house.

c) Smith goes to the woods, cuts down trees, and builds a garage from logs that is worth $8,000.

d) The Jones family sells its old house to the Reynolds family for $125,000. The Joneses then buy a newly constructed house for $180,000

Answer 1

A) Smith payment of 8000 to carpenter is Investment.

It falls under through expenditure approach to gross private investment and subpart of residential investment.

The GDP will increase by 8000$.

B)It falls through value added approach or output approach,.

The smith added 6000(8000-2000) value .

So GDP Increases by 6000.

C)IT falls through income under proprietors income.

So GDP Increases by 8000$.

D)This falls through expenditure approach under gross private investment spending and under subpart residential investment.

So GDP Increases by 180,000$.