Question

Briefly discuss why the domestic work undertaken by a stay at home mother or drug dealers are not included as part of GDP? Provide an example of such a situation​​​​​​​​​​​​(5 marks)

b. In the country of Hypothetica, we have the following information for the year 2015:

*Consumption totalled $2 billion, but 25% of this total consisted of goods which were initially sold in 2014.

*A total of $250 million worth of new housing stock was sold.

*Labour wage income was $150 million.

*Businesses invested $100 million dollars in new capital (i.e. machinery) stock.

*Businesses also bought $200 million dollars worth of company shares on the stock exchange.

*Foreigners with working visas living in foreign-only households bought $100 million worth of locally made goods and services.

*The government spent $500 million building roads.

*Hypothetica is a closed economy, thus they are no exports and imports.

(i) Calculate and explain how you obtained the figure (i.e. what did you count, and what did you exclude) for Hypothetica’s consumption in 2015​​(2 marks)

(ii) Calculate and explain how you obtained the figure (i.e. what did you count, and what did you exclude) for Hypothetica’s investment in 2015​​(2 marks)

(iii) What was Hypothetica’s GDP in 2015 using the expenditure method? Explain your answer​​​​​​​​​(2 marks)

c. The standard of living in Argentina is higher than the standard of living in Luxembourg purely because the size of Argentina’s real GDP in 2018 (using 2010 constant prices) was USD446,880.91 million as opposed to Luxembourg’s USD67,301.21 million (figures from the World Development Index Database).

Do you agree or disagree with this statement? Refer to the UN Human Development Index to Justify your answer.​​​​​​​​(4 marks)

Answer 1

Answer:

a) The domestic work undertaken by a stay at home mother is not calculated in GDP because it cannot be valued or quantified. Even if it can be valued, she is not get paid. Drug dealers are not included as they are part of illegal trading, but their money will enter GDP through their retail sales and services when they buy or sell their cars, phones, etc..

b)

(i) Hypothetica’s consumption in 2015​​:

local consumption: $1.5 billion (25% of $2 billion was consumed last year)

housing stock: $250 million

foreigner's consumption: $100 million

building roads: $500 million

So, total consumption is $2.35 billion

(ii) Hypothetica’s investment in 2015:

Business investment in machinery: $100 million

investment in shares: $200 million.

So, total investment is $300 million.

(iii) The Formula for GDP by Expenditure method is :

GDP = C + I + G + (X-M)

where,

C = Consumer spending on goods and services

I = Investor spending on business capital goods

G = Government spending on public goods and services

X = Exports

M = Imports

So, GDP of Hypothetica will be:

  Consumer spending on goods and services: $1.85 billion (local and foreigners consumption, house hold stocks)

  Investor spending on business capital goods: $300 million (Business investment in machinery and stocks)

  Government spending on public goods and services: $500 million (building roads)

Since it is a closed economy, there are no imporrts and exports.

So, GDP = $1.85 billion + $300 million + $500 million

ie, $2.65 billion (million is converted into billion by dividing by 1000)