Question

Peter, Paul and Mary live in North Carolina. Peter grows and sells marijuana to Mary. Paul is an organic farmer who sells broccoli to Mary. Assume that marijuana is an illegal good and broccoli is a legal good. Assume that if Mary marries either, they give her what they use to sell her. Which of the following statements is consistent with the way GDP is computed?
A. GDP will rise if Mary marries either Peter or Paul.
B. GDP will fall if Mary marries either Peter or Paul.
C. GDP will fall if Mary marries Peter but not if she marries Paul.
D. GDP will fall if Mary marries Paul but not if she marries Peter.
E. GDP remains the same whether Mary marries Peter or Paul.

Which of the following statements is (are) correct?
(x) In the calculation of GDP, government purchases include spending on goods and services by local, state and federal governments.
(y) Final goods and services purchased by the government are included in GDP but transfer payments from the government to households are not included in GDP.
(z) After the terrorist attack in 2001 in the United States, governments raised expenditures to increase security at airports. These purchases of goods and services are not included in GDP since they are not productive.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (x) only

Maxima Motors is a French-owned company that produces automobiles and all of its automobiles are produced in United States plants. In 2014, Maxima Motors produced $32 million worth of automobiles, with $17 million in sales to Americans, $11 million in sales to Canadians, and $4 million worth of automobiles added to Maxima Motors’ inventory. The transactions just described contribute how much to U.S. GDP for 2014?
A. $15 million
B. $17 million
C. $21 million
D. $28 million
E. $32 million

Answer 1

1. GDP only considers sale o legal goods. Paul sells broccoli to Mary, which is a legal good. If Mary marries Paul, the transaction does not occur and GDP falls. GDP will fall if Mary marries Paul. Option d) is correct.
2. X is true. Y is true as transfer payments are excluded from GDP. Z is not true as defence expenditure is included in GDP. Option b) is correct.
3. $11 million is sold to Canadians, so it won’t be included. Inventories are included in GDP. So 17 + 4 = 21 dollar is the contribution. Option c) is correct.