Question

How would the following affect GDP? a. Government transfer payments increase. b. Student sells used CD to record store. c. Car owner pays auto repair shop \(\$ 500\) to fix his car.

Short answer

Only auto repair payment affects GDP positively.

Step-by-step solution

Understanding Government Transfer Payments

Government transfer payments, such as welfare or social security, are not part of GDP because they do not reflect the purchase of goods or services. They are transfers of income, not outputs.

Analyzing the Sale of Used Goods

When a student sells a used CD to a record store, it does not affect GDP. GDP measures current production of goods and services, and used items have already been counted in GDP when they were first produced and sold.

Evaluating Services Paid for Auto Repairs

When a car owner pays \(\$ 500\) to an auto repair shop, it affects GDP positively. This transaction is payment for a service provided during the year, which contributes to GDP, as it involves current economic activity.

Key concepts

Government Transfer Payments

Government transfer payments refer to financial disbursements made by the government to individuals. These include welfare benefits, unemployment payments, and social security. While these payments certainly affect the economy by influencing the recipients' income and purchasing power, they do not count towards the Gross Domestic Product (GDP). The main reason is that GDP measures the total value of all goods and services produced within a country during a specific time period.

As government transfer payments are simply transfers of money and not exchanges for new goods or services, they do not count as part of any new production. For example, when the government gives a social security check to a retiree, no new good or service is produced in return for this check. Hence, such payments are recorded as income but do not contribute to the actual output that GDP tracks.

Sale of Used Goods

When considering the sale of used goods, it is important to understand that these transactions are essentially exchanges of already existing items. GDP focuses on capturing the value of new goods and services produced within a particular year.

For example, if a student sells a used CD to a record store, this transaction does not influence GDP. The reason is that the production of the CD was already counted in GDP when it was first manufactured, bought, and sold as a new item. Including the sale of this used CD again would result in double-counting, which GDP calculations aim to avoid. GDP's purpose is to measure current production, not the resale of items already produced in previous periods.

Service Payment

Payments for services are a significant component of GDP as they represent current economic activity. This includes various transactions where services are performed, such as repairs, consultations, and professional assistance. When a car owner pays $500 to an auto repair shop, this payment is recognized as part of the GDP.

This occurs because the payment signifies that a service has been rendered. The repair shop contributes to GDP by providing labor and parts to fix the vehicle, which are considered production activities executed during the year. Service payments reflect immediate consumption and production, embodying the economic activities that GDP aims to track and measure.

Key points about service payments and GDP include:

• Service transactions are included in GDP during the year they occur.
• They reflect the value of work performed, such as healthcare, education, and maintenance.
• These services contribute to economic growth and are consistently calculated within GDP figures.