Question

Is the value of a house built in 2008 and resold in 2019 included in the GDP of 2019 ? Briefly explain. Would the services of the real estate agent who helped sell (or buy) the house in 2019 be counted in GDP for $2019?$ Briefly explain.

Short answer

No, the value of the house resold in 2019 is not included in the GDP of 2019 as it is not a newly produced good. However, the services of the real estate agent, performed in 2019, are included.

Step-by-step solution

Determining if the resale of the house contributes to the GDP of 2019

Any economic goods or services that were produced in previous years would not be included in the GDP of the current year. Hence, the value of a house built in 2008 and resold in 2019 is not included in the GDP for 2019 because it is not a newly produced good.

Determining if the services of the real estate agent contribute to the GDP of 2019

The services of a real estate agent who assisted in selling the house in 2019 would be counted under GDP for 2019. This is because GDP includes the market values of newly produced goods as well as services rendered in a given year. Therefore, even though the house itself (a physical good) does not contribute to the GDP of 2019, the services rendered by the real estate agent in selling the house are to be included in the GDP of 2019.

Key concepts

Economic Goods

Economic goods are products that have a value and can be traded in the market. They are tangible items that people buy and use. Examples include cars, clothes, and houses. These goods are essential because their production and sale help to measure a country's economic activity. To determine the Gross Domestic Product (GDP), which is the total value of all goods and services produced in a country within a year, it is crucial to focus only on goods that are newly produced.
Reselling items, such as a house built in previous years, does not count in the GDP calculation of the current year. This is because they are not newly produced items, but existing goods changing ownership. The sales of new cars, houses built in the current year, and other freshly manufactured items, however, would count toward the GDP for that year.
In the exercise, the house built in 2008 and resold in 2019 does not add to the 2019 GDP, as it was not produced in that year.

Services in GDP

Services are an integral part of GDP, as they represent the activities performed by professionals in exchange for money. These include services provided by doctors, teachers, real estate agents, and more. Unlike economic goods, services are intangible but their creation in a given year is essential to measure economic output.
In GDP calculations, services are valued similarly to physical goods, provided they are completed within the year of assessment. This means that services contribute significantly to the GDP and often reflect economic health and labor market activity.

• An example is the work of a real estate agent helping to sell a house. Their services in 2019 count toward that year's GDP, even though the house itself does not, because what matters is the service being provided and paid for within the year.

Although the house is a tangible asset, the agent's service of selling it is a current economic activity. Thus, the exercise correctly points out that while the house's value does not impact the 2019 GDP, the agent's services do.

Real Estate Market

The real estate market involves the buying, selling, or renting of land and buildings. It is a significant component of any economy due to its impact on both the goods and services sectors. The construction of new properties contributes to the production of goods, while transactions involving existing properties relate more to services.
In GDP accounting, the key is to distinguish between these aspects:

• New construction activities are counted in GDP as they represent new production.
• Transactions of existing properties, like reselling a house, do not count, except for the services linked to these transactions.

These services, which include the work of real estate agents or loan officers, are critical as they are seen as facilitating economic activity and are counted in GDP.
The exercise illustrates this distinction. By identifying the agent's service as valid for GDP inclusion, it highlights the broader economic activities present in the real estate market that can impact the GDP even without new construction.