Question

. Describe what impact the following activities have on Real GDP. Specify which approach (expenditure, income, value added) you use in your explanation. If you use the expenditure approach, specify which component of spending is affected.
a) Ann’s Cement Inc. purchases $1500 of concrete from Jimi’s Stone Company. Ann’s uses the cement to create concrete blocks, and sells the concrete blocks to Walmart for $2500 as construction materials.

b) Jimi earns $800 per day working as a paramedic and works for three days.

c) Kyle buys a used record at Haffa’s Record Store for $10.

d) Bob sells used records at Haffa’s and earns $50 per day in wages.

e) The Clinton Foundation receives a million dollar grant from the U.S. government.

f) Athens County installs a new sewage system for $50 million dollars. g) Joe get a cavity filled by the dentist. The total cost of the appointment is $500, and Joe pays $50. His insurance pays the rest.

h) Jackie O’s brews a keg of “Ricky’s” beer, but can’t sell it this month. They add it to their storeroom. The value of the keg is $80

i) One month later, Jackie O’s sells the keg for $80 to frat party.

RGDP is Real GDP

Answer 1

(a) Under Value-added approach, GDP rill rise by $1,000 (= $2,500 - $1,500).

(b) GDP will rise by $2,400 (= 4 x $800) under Income approach, as Wage income.

(c) GDP will be unchanged, since transactions involving used goods will not impact GDP.

(d) GDP will rise by $50 (per day) under Income approach, as Wage income.

(e) GDP will not change, since the grant is a Transfer Payment that is excluded from GDP.

(f) GDP will rise by $50 million as Government expenditure component under Expenditure method.

(g) GDP will rise by $500 as Wages income (earned by Dentist, irrespective of who pays how much), under Income approach.

(h) GDP will rise by $80 as Investment (Increase in inventory) component of GDP using Expenditure method.

(i) Investment will fall by $80 as inventory gets sold, and consumption expenditure will rise by $80, so under Expenditure method, GDP will be unchanged as net effect.