The following transactions take place in 2000: 1- An elderly couple goes to the movies and pays...

Question:

The following transactions take place in 2000:

1- An elderly couple goes to the movies and pays $150 for the tickets.

2- A family sells numerous knick-knacks at a garage sale for $125.

3- A young executive buys 100 shares of IBM for $10,000.

4- A college student receives $800 from his parents.

5- A young couple down on their luck receives food stamps worth $230.

6- A plumber performs work for a neighbor and receives $125 in cash that he does not record in his company's records.

7- A physician operates on a friend's husband and charges $2,000 for the operation instead of her usual $5,000.

8- A teenager paints the porch on his parents' house. The paint cost $95. The cost of hiring a professional to do the job would have been $400.

9- A high school graduate works a summer job and makes $7,000.

10- The Federal Reserve Bank sells a bond for $2,000. The addition to gross domestic product is

A- $9,245.

B- $25,525.

C- $13,525.

D- $17,645.

Calculating Gross Domestic Product:

GDP measures the total value of final goods and services produced in an economy during a specified period, most commonly a year. When measured by the expenditure approach, GDP is comprised of consumption (C), investment (I), government spending (G), and net exports (NX). GDP includes only goods ans services produced in the current period and excludes intermediate goods and services.

Answer and Explanation:

The correct answer is A: $9,245..

The various transactions are assessed as follows.

1 This falls under the category of consumption (C). Hence we add $150 to GDP.

2 Sales of used or second hand goods are not included in GDP. Hence we add $0 to GDP.

3 Buying shares merely involves a transfer of financial assets and is not included in the measurement of GDP. Hence we add $0 to GDP

4 A transfer of money is not included in the measurement of GDP because it is not an expenditure on a currently produced good or service. Hence we add $0 to GDP.

5 Welfare payments are not included in the measurement of GDP because it is merely a transfer payment. It will most likely used for consumption later and will be added to GDP at that time. Hence we add $0 to GDP.

6 Underground economy payments are not included in the measurement of GDP unless they are detected by the authorities. Hence we add $0 to GDP.

7 This falls under the category of consumption (C). A service was produced and consumed at a discount. Hence we add $2,000 to GDP.

8 The expenditure on the paint falls under the category of consumption (C). Hence we add $95 to GDP.

9 This falls under the category of consumption (C) or investment (I), depending on the nature of the work. Hence we add $7,000 to GDP.

10 Sales of bonds are not included in the measurement of GDP because they merely involve the exchange of financial assets and are not an expenditure on a currently produced good or service. Hence we add $0 to GDP.

The total addition to GDP is {eq}\$150 + \$2,000 + \$95 + \$7,000 = \$9245. {/eq}


Learn more about this topic:

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Gross Domestic Product: How to Calculate Real GDP

from Economics 102: Macroeconomics

Chapter 5 / Lesson 6
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