Question

7. Which COMPONENT(S) (if any) of U.S. GDP (consumption C, invest- ment I, government spending G, and/or net exports NX) THIS YEAR would be affected and HOW (increase or decrease) if: (a) You buy Exxon Mobil stock from a broker who charges you a small fee. (b) A German citizen buys a new house in Miami beach and rents it to a French citizen. (c) You buy an old computer for your business. (d) General Motors sells some cars that entered its inventory last year (e) United Airlines buys a new Airbus airplane produced in Europe, (f) The government increases the monetary transfers to the poor. (8) You pay your tuition. (h) A new Boeing airplane is bought by Air China. (1) The government builds a new interstate highway 6) A friend of yours buys some illegal drugs. (k) Taylor Swift releases a new single (assume nobody has bought it yet).

Answer 1

a). All transactions which are not directly representing production are excluded from the calculation of GDP. The financial transactions like the purchase of stocks, bonds, mortgage securities and credit default swaps are excluded. But the commission of a stock broker on the sale of financial instruments is included in GDP since it the value of a service. The component of GDP (C) increase.

Answer: Consumption (C) Increase.

b) The house is produced domestically and purchased by a foreign citizen. It is considered as export and included in GDP. The component of GDP(Nx) increase.

Answer: (Nx) Increase.

c) A goods produced in an early year and sold in the current year does not include in the GDP. In other words the resale of old goods do not included in the value of GDP since its value is already counted in the previous year of manufacturing. You purchased an old computer for your business. It is a part of your investment. But it does not included in investment. Thus the estimated investment is lower than the actual investment.

Answer: (I) decrease.

d) The finished goods and inventories of the current year are included in GDP as investment. The inventories of previous year are already counted and it does not come in the current year GDP. The estimation of investment is lower than actual investment.

Answer: (I ) decrease.

e) Purchase of foreign product is considered to be import. A component of GDP is X-M (export minus import). The purchase of foreign goods by the residents increases the value of import and reduces the net export. Hence this transaction reduces net export in GDP.

Answer: (X-M) Decrease.

f) Government’s transfer payment does not include in the valuation of GDP since it is only a monetary transaction and contribute nothing to production. The estimated government spending becomes shorter than the actual expenditure by the government.

Answer: (G) decrease.

g) Payment on services included in GDP. Tuition fee is consumption expenditure and include in GDP.

Answer: (C) Increase.

h) When a country’s product is purchased by a foreign country, the net export increase and the GDP also increase.

Answer: (Nx) Increase.

i) The construction of highway increase government purchase (G) in GDP.

Answer: (G) Increase.

j) Illegal transactions are excluding from the computation of GDP because they are considered to be bad or the society’s welfare. The consumption of illegal drugs excluded and thus (C) decrease.

Answer: ( C) decrease.

k) All goods and services entered into the market are included in GDP. When it is purchased by the consumers it is considered as an increase in consumption(C). Before the purchase it is considered as investment (I). The component of GDP (I) increase.

Answer: (I) Increase.