Question

For each of the following transactions, 1) determine whether it should be included in the calculation of GDP using expenditure approach and 2) if the answer is yes, which component of expenditure should it be included, if the answer is no, briefly explain why.

• John bought 1000 shares of Microsoft stocks at $50 per share
• Honda built a factory plant worth $1 million in Detroit
• Karl received $100 unemployment benefits
• Jane, a Canadian, spent $500 in NYC on her last visit .
• Walmart had an increase of $1 billion worth of unsold goods in its warehouse at the end of the year.

Answer 1

Using expenditure Approach,

GDP = Personal Consumption expenditure (C) + Gross domestic private Investment (I) + Government spending (G) + Net exports (NX = Exports - Imports)

(1) John bought 100 shares of Microsoft stock - Not included in GDP

Reason: Transactions involving stocks and bonds are only transfer of ownership which is not counted as part of GDP.

(2) Honda built factory in Detroit - Included in GDP (under I)

(3) Karl received $100 unemployment benefits - Not included in GDP

Reason: Unemployment benefit is a transfer payment by government for which no service is received in return. Transfer payments are excluded from GDP.

(4) Canadian spent $100 on NYC Visit - Included in GDP (under NX, since this is equivalent to export of goods by US)

(5) Walmart had increase of $100 billion unsold goods - Included in GDP (under I, since unplanned inventory accumulation is a part of gross domestic private investment