Question

For each of the following transactions, indicate whether it represents an increase in the U.S. gross domestic product (GDP), and, if so, state whether it represents U.S. consumption, investment, government purchases of goods or services, or net exports. If the transaction does not change U.S. GDP explain why not?
a. Ms. Scott buys a used Honda Accordfrom her friend Danielle for $7,500.
b. You spent $12,500 on college tuition this year.
c. Pizza Hut buys 100 pounds of cheese from Wisconsin to make pizzas.
d. Mr. Luong is a Chinese citizen who works as a Chemistry teaching assistant at UC Mercedandearns $16,000 a year in salary.
e. A candy store buys $500 worth of chocolates made in Belgium.
f. Boeing produces 5 airplanes but are unable to sell them.

Answer 1

Answer:

a. No change in GDP.

There will be no change in GDP resulting from this transaction. Resales are considered double counting because the good had already been paid for before and so will inflate GDP.

b. GDP increase by $12,500. U.S. Consumption.

This is a consumption transaction as money is being spent to satisfy the need for education. It will therefore increase GDP by $12,500.

c. No change in GDP.

Intermediate goods to be used in production are not included in GDP to avoid double counting. Only the final value of goods and services are included. This is an intermediate good and so will not be included.

d. Increase in GDP $16,000. Government purchase of goods or services.

Mr. Luong works in a Public University which means that his salary is paid for by the government. This will increase GDP by $16,000 as it represents money spent by Government.

e. Decrease in GDP $500. Net Exports.

As this good was bought from outside the country, it is an import. Imports reduce a country's GDP because they reduce the Net exports. GDP will therefore reduce by $500.

f. Increase in GDP by plane value. Investment.

So long as the goods have already been produced in their final form, they will be part of GDP. They will increase GDP by their value and are a part of Investment.