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Although GDP is a reasonably good measure of a nation's output, it does not necessarily include...

Question:

Although GDP is a reasonably good measure of a nation's output, it does not necessarily include all transactions and production for that nation.

Which of the following scenarios are either not accounted for or measured inaccurately by either the income or the expenditure methods of calculating GDP for the United States? Check all that apply.

a. The value of baby-sitting services, when the babysitter is paid in cash and the transaction isn't reported to the government

b. The costs of air and water pollution

c. Funds spent by city governments to renovate their buildings

d. The leisure time they have

When a US company purchases and imports wood from Brazil to use to build new houses, within the United States, this purchase increases the INVESTMENT / CONSUMPTION / GOVERNMENT PURCHASES component of GDP, while also DECREASING / INCREASING net exports by the same amount. Therefore, the purchase of wood from Brazil AN OVERALL DECREASE / NO OVERALL CHANGE / AN OVERALL INCREASE in US GDP.

Gross Domestic Product

The Gross Domestic Product, or GDP, is the measure of the economic production power of a country during a period of time. It is used to gague the strength of a country's economy, and compare it with past periods to ensure that growth is continuing to occur. When GDP does not grow, there is risk of a recession.

See the equation below on how to calculate GDP:

GDP: GDP = C + I + G + (X - M)

= private consumption + gross investment + government investment + government spending + (exports - imports).

Answer and Explanation:

The correct answers are bolded below.

a. The value of baby-sitting services, when the babysitter is paid in cash and the transaction isn't reported to the government

b. The costs of air and water pollution

c. Funds spent by city governments to renovate their buildings

d. The leisure time they have

For item A, since the cost of the baby sitter is not communicated with the government (via taxes or other method) that amount cannot be included in the GDP calculation.

For item D, leisure time is not included in the GDP calculation.


Learn more about this topic:

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Overview of the Gross Domestic Product

from CLEP Social Sciences and History: Study Guide & Test Prep

Chapter 59 / Lesson 2
3.4K

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