Question

The expenditure and value-added approaches for calculating GDP arrive at the same final number, but they calculate that number in different ways. To illustrate this, think about the effects of the transactions in the following story about GDP: • Zach pays Better Buy $1,100 to install a new high-definition television (HDTV) on his living room wall. He's attracted by Better Buy's guarantee that he'll be happy with the new HDTV, or he'll get his money back. • Better Buy pays Firedog $750 to install the HDTV. • Firedog buys hardware worth $100 from The Home Station. Assume that The Home Station gets the hardware for essentially nothing and that other costs are $0. To compute the contribution to GDP using the expenditure approach, you have to add the amount of money spent by buyers on final goods and services. Which of the following would be included in the expenditure method of calculating GDP? Check all that apply. O Zach spends $1,100. Firedog spends $100. Better Buy spends $750. The total contribution to GDP, measured by the expenditure method, is $750 Now use the following table to compute the contributions to GDP for this economy using the value-added approach. In particular, indicate the cost of intermediate goods and the value added at each stage of production. Sale Value Cost of Intermediate Goods Value Added Stage of Production The Home Station Firedog Better Buy $100 $750 $1,100 The contribution to GDP that you found using the expenditure approach corresponds to the sum of the sale value at each stage of production. cost of intermediate goods sale value value added

Answer 1

Zach spends 1100 $ . ( Zach is the final consumer and buys the final product )

Total contribution to GDP = 1100 $ ( If 750 $ is also counted then there will be double counting error )

Cost of intermediate goods : _ , 100 ( Firedog pays 100 to Home station ) , 750 ( Better buy pays 750 for installation )

Value added : 100 , ( 750 - 100 ) = 650 , (1100 - 750 ) = 350

Sum of value added = 100 + 650 + 350 = 1100 $

Corresponds to sum of value added .