Q8. Assume that the total value of t... [FREE SOLUTION]

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Chapter 7: Q8. (page 153)

Assume that the total value of the following items is $600 billion in a specific year for Upper Mongoose: net exports = $50 billion; value of new goods and services produced in the underground economy = $75 billion; personal consumption expenditures = $300 billion; value of the services of stay-at-home parents = $25 billion; gross domestic investment = $100 billion; government purchases = $50 billion. What is Upper Mongoose鈥檚 GDP for the year? What is the size of the underground economy as a percentage of GDP? By what percentage would GDP increase if the value of the services of stay-at-home spouses were included in GDP?

Short Answer

Expert verified

Upper Mongoose鈥檚 GDP for the year is $500 billion.

The underground economy is 15% of the GDP.

If the value of stay-at-home parents service was included, the GDP would have increased by 5%.

Step by step solution

Upper Mongoose’s GDP

According to expenditure method, GDP = C + I + G + NX.

The value of the underground economy is not included because it is an illegal economy and is not accounted for in records. At the same time, the value of stay-at-home services is not included because they are not selling any service in the market and are not generating income.

GDP = (300 + 100 + 50 + 50) billion USD

GDP = $500 billion

Therefore, Upper Mongoose鈥檚 GDP for the year is $500 billion.

Percentage of the underground economy

$P e r c e n t a g e o f U n d e r g r o u n d E c o n o m y = \frac{V a l u e o f U n d e r g r o u n d E c o n o m y}{G D P} 脳 100 = \frac{75}{500} 脳 100 = 15 %$

Thus, the value of the underground economy is 15% of Upper Mongoose鈥檚 GDP.

Percentage increase in income due to inclusion of stay-at-home parents services

If the value of stay-at-home services was to be included, the GDP would have increased by some percentage.

$P e r c e n t a g e o f S t a y a t h o m e p a r e n t s s e r v i c e s = \frac{V a l u e o f S t a y a t h o m e s e r v i c e s}{G D P} 脳 100 = \frac{25}{500} 脳 100 = 5 %$