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Chapter 7: Q2. (page 153)

Assume that a grower of flower bulbs sells its annual output of bulbs to an Internet retailer for \(70,000. The retailer, in turn, brings in \)160,000 from selling the bulbs directly to final customers. What amount would these two transactions add to personal consumption expenditures and thus to GDP during the year?

Short Answer

Expert verified

Only $160,000 will add to personal consumption expenditures and GDP during the year.

Step by step solution

01

Meaning of GDP

Gross Domestic Product (GDP) measures the income of an economy generated by producing goods and services within the domestic boundaries of the economy in a year for final consumption.

It includes factors like national private consumption, gross investment, government expenditure, and net exports. However, it does not comprise intermediate products, secondhand or non-productive transactions.

02

Calculating GDP

The income generated from the sale of bulbs to an internet retailer is an intermediate process. The retailer has sold it again to the final consumers generating additional income on the same product.

Counting both gains (the value added by selling to a retailer and to consumers) will create an issue of double counting the value of flower bulbs.Therefore, the economy鈥檚 GDP will not calculate the revenue generated from the sale of flower bulbs to the internet retailer.

The income generated from the sale of flower bulbs to final consumers will add to private consumption. Therefore, $160,000 will be counted in the GDP of the economy during the year.

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Most popular questions from this chapter

Suppose that annual output in year 1 in a three-good economy is 3 quarts of ice cream, 1 bottle of shampoo, and 3 jars of peanut butter. In year 2, the output mix changes to 5 quarts of ice cream, 2 bottles of shampoo, and 2 jars of peanut butter. If the prices in both years are \(4 per quart for ice cream, \)3 per bottle of shampoo, and $2 per jar of peanut butter, what was the economy鈥檚 GDP in year 1? What was its GDP in year 2?

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