Question

Definition and Measures of GDP

A. Suppose Colonel Hogwash purchases a Civil War-era mansion for $1,000,000 for personal use and the broker’s fee is 6%. The current year’s GDP {INCREASES, DECREASES, DOES NOT CHANGE}. If it changes, it changes by $___________.

B. Suppose a homemaker enters the workforce, taking a job that will pay $40,000 over the year. The homemaker must pay $16,000 over the year for professional child care services. The current year’s GDP {INCREASES, DECREASES, DOES NOT CHANGE}. If it changes, it changes by $___________.

C. A Korean car company builds an auto plant in Alabama for $100,000,000, using only local labor and materials. The current year’s GDP {INCREASES, DECREASES, DOES NOT CHANGE}. If it changes, it changes by $___________.

Answer 1

Suppose Colonel Hogwash purchases a Civil War-era mansion for $1,000,000 for personal use and the broker’s fee is 6%. The current year’s GDP increases. If it changes, it changes by the amount of commission paid, which will be 0.06*1000000 = $60,000. The mension purchase is just transfer of ownership and it doesn't add value to the economy.

Suppose a homemaker enters the workforce, taking a job that will pay $40,000 over the year. The homemaker must pay $16,000 over the year for professional child care services. The current year’s GDP will increase by $40,000.

A Korean car company builds an auto plant in Alabama for $100,000,000, using only local labor and materials. The current year's GDP will increase by $100 million worth capital goods. The goods have been sourced locally with local labor and materials.