Question

a. (5%) Suppose a car sold to a dealer at $50,000 in 2018 and the dealer sold it to a consumer at $72,000 in 2019. How much GDP is affected in 2018 and 2019, respectively? b. (5%) Suppose a person paid $10,000 to hire a housekeeper in 2018. In 2019, the person got married to the housekeeper and gave $15,000 for pocket money. How much GDP is affected in 2018 and 2019, respectively? c. (5%) Suppose nominal GDP increased from $200 billion to $480 billion between 2018 and 2019 and GDP deflator rose from 100 to 160. What is the change in real GDP (%) during this period. d. (5%) Company A produced 4 tires and company B produced navigation. An automobile company that bought the tires at $300 and the navigation at $200, produced a car and sold it at $30,000. The automobile company paid employees $10,000. How much GDP is affected?

Answer 1

a). In 2018 the $50,000 will be added as GDP in the GDP account of 2018. Because the car sold to dealer in 2018 at the price of$50,000. In 2019 the car sold to consumer at the price of $72,000. So addition of value in the car price in 2019 is $72,000 - $50,000 = $22,000. This $22,000 will be added in the GDP of 2019. The $50,000 price of car will act as inventory in 2019 counting of GDP. Because car was not sold finally in 2018. In 2019 it is a inventory in the account of GDP of 2019. So in 2018 $50,000 will be counted in GDP and in 2019 $22,000 will be counted or added in the GDP.

b). In 2018, the person hire the housekeeper at the cost of $10,000. In this year i.e in 2018, it is a earning to the housekeeper and GDP will change by $10,000. Because housekeeper is giving a service to the person and in return for this service housekeeper is getting that money. So, $10,000 will be added in the GDP of 2018. In 2019, the housekeeper get $15,000 as pocket money but this will not be added in the GDP of 2019 because this household service are not added in GDP. This $15,000 is the transfer payment for the the person to the housekeeper.

c). In 2018 GDP deflator is 100. We know that GDP deflator is = (Nominal GDP/Real GDP)*100. In 2018 nomial GDP is $200, therefore 100 = ($200/Real GDP)*100 , therefore real GDP = $200. In 2018, real GDP is $200. In 2019, GDP deflator rises to 160 and nomial GDP rises to $480. Therefore 160 = ($480/Real GDP)*100 , therefore real GDP = $480*160/100 = $300.

d). Company A produced 4 tires and company B produce navigation. Automobile company bought 4 tires at $300 and navigation at $200. The automobile company paid to its workers is $10,000. Therefore GDP will be affected by $ 30,000. Because it is the final value of goods i.e the car.