Chapter 10, Problem 1FRQ

a)

To determine

The question requires us to determine the transactions which are included in the country U’s GDP, and which are not included in the country U’s GDP.

Explanation of Solution

Yes, the structure of the new bottling plant in country U will be included in the GDP because the construction of new plants is an example of the final product, and it is considered investment spending in the estimation of GDP.

Economics Concept Introduction

GDP is the measurement of all final goods and services produced in an economy in a financial year. The calculation of GDP includes domestically produced final goods and services such as capital goods, change in inventory, and newly constructed structures in financial years. It doesn’t include intermediate goods and services (to avoid the double entry problem), used goods, stocks and bonds, foreign-produced goods and services, and other items.

b)

To determine

The question requires us to determine the transactions which are included in the country U’s GDP, and which are not included in the country U’s GDP.

Explanation of Solution

No, sales of existing or used airplanes will not be included in the GDP of the country U because GDP estimation doesn’t include used items.

c)

To determine

The question requires us to determine the transactions which are included in the country U’s GDP, and which are not included in the country U’s GDP.

Explanation of Solution

No, purchasing an existing share represents the transfer of ownership, not any production. So, it will not be included in the GDP of the country U.

d)

To determine

The question requires us to determine the transactions which are included in the country U’s GDP, and which are not included in the country U’s GDP.

Explanation of Solution

The national income (GDP) is the sum of consumption spending (C), investment spending (I), government expenditure (G), and net exports.

Net export = Export (X) − Import (IM)

GDP = C + I + G + X − IM

Yes, selling domestically produced goods in a foreign nation represents the exports of the bottle of Chardonnay. Thus, it will be included in the GDP of the country U.

e)

To determine

The question requires us to determine the transactions which are included in the country U’s GDP, and which are not included in the country U’s GDP.

Explanation of Solution

The national income (GDP) is the sum of consumption spending (C), investment spending (I), government expenditure (G), and net exports.

Net export = Export (X) − Import (IM)

GDP = C + I + G + X − IM

No, purchasing French perfume represents the import. Thus, it will not be included in the GDP of the country U.

The GDP estimation doesn’t include imports.

f)

To determine

The question requires us to determine the transactions which are included in the country U’s GDP, and which are not included in the country U’s GDP.

Explanation of Solution

The national income (GDP) is the sum of consumption spending (C), investment spending (I), government expenditure (G), and net exports.

Net export = Export (X) − Import (IM)

GDP = C + I + G + X − IM

Yes, the addition of surplus books to its inventories is part of the investment. Thus, it will be included in the GDP of the country U.