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Chapter 8: Q. 9 (page 186)

Explain what happens to contributions to GDP in each of the following situations.

a. A woman who makes a living charging for investment advice on her Internet Web site marries one of her clients, to whom she now provides advice at no charge.

b. A man who had washed the windows of his own house every year decides to pay a private company to wash those windows this year.

c. A company that had been selling used firearms illegally finally gets around to obtaining an operating license and performing background checks as specified by law prior to each gun sale.

Short Answer

Expert verified

Situation a:

As a result, her free service, which would normally be paid.

Situation b:

The amateur is unemployed, and winning a trophy

Situation c:

Current year's GDP, legitimate sales of used fire guns will have no impact on GDP.

Step by step solution

01

Step 1:     Situation a

a) In this scenario, because the woman delivers her services to her client and spouse for free, she is not contributing to the GDP.

As a result, her free service, which would normally be paid, diminishes the measured GDP.

02

Step 2:     Situation b

b) In this case, the amateur is unemployed, and winning a trophy raises the measured GDP.

03

Step 3:     Situation c

c) Because used sales of any consumer or capital good are not included in the current year's GDP, legitimate sales of used fire guns will have no impact on GDP.

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Most popular questions from this chapter

Why do you suppose that there is a positive relationship between nations' tax rates and the relative size of their underground economies?

Each year after a regular spring cleaning, Maria spruces up her home a little by retexturing and repainting the walls of one room in her house. In a given year, she spends \(25on magazines to get ideas about wall textures and paint shades, \)45on newly produced texturing materials and tools, \(35on new paintbrushes and other painting equipment, and \)175on newly produced paint. Normally, she preps the walls, a service that a professional walltexturing specialist would charge \(200to do, and applies two coats of paint, a service that a painter would charge \)350to do, on her own.

a. When she purchases her usual set of materials and does all the work on her home by herself in a given spring, how much does Maria's annual spring texturing and painting activity contribute to GDP?

b. Suppose that Maria hurt her back this year and is recovering from surgery. Her surgeon has instructed her not to do any texturing work, but he has given her the go-ahead to paint a room as long as she is cautious. Thus, she buys all the equipment required to both texture and paint a room. She hires someone else to do the texturing work but does the painting herself. How much would her spring painting activity add to GDP?

c. As a follow-up to part (b), suppose that as soon as Maria bends down to dip her brush into the paint, she realizes that painting will be too hard on her back after all. She decides to hire someone else to do all the work using the materials she has already purchased. In this case, how much will her spring painting activity contribute to GDP?

Which of the following are production activities that are included in GDP? Which are not?

a. Mr. King performs the service of painting his own house instead of paying someone else to do it.

b. Mr. King paints houses for a living.

c. Mrs. King earns income from parents by taking baby photos in her digital photography studio.

d. Mrs. King takes photos of planets and stars as part of her astronomy hobby.

e. E鈰�Trade charges fees to process Internet orders for stock trades.

f. Mr. Ho spends \(10,000on shares of stock via an Internet trade order and pays a \)10brokerage fee.

g. Mrs. Ho receives a Social Security payment.

h. Ms. Hernandez makes a $300payment for an Internet-based course on stock trading.

i. Mr. Langham sells a used laptop computer to his neighbor.

Why might a range of dashboard economic indicators be difficult to include in one single measure such as GDP?

Explain the expenditure and income approaches to tabulating GDP.
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