Question

Which of the following transactions would count in GDP? Select one or more answers from the choices shown.'a. Kerry buys a new sweater to wear this winter. b. Patricia receives a Social Security check. c. Roberto gives his daughter 50 dollars for her birthday. d. Latika sells 1,000 dollars of General Electric stock. e. Karen buys a new car. f. Amy buys a used car.

Short answer

Transactions a (new sweater) and e (new car) count in GDP.

Step-by-step solution

Understand GDP

GDP, or Gross Domestic Product, is the total market value of all final goods and services produced within a country in a given period. It includes consumption spending on new goods and services, investment spending, government purchases, and net exports.

Evaluate Transaction a

Kerry buys a new sweater, which is a new good, consumed within the economy. Thus, this transaction counts toward GDP as it reflects consumption of goods produced.

Evaluate Transaction b

Patricia receiving a Social Security check is a transfer payment from the government and does not represent payment for goods or services. Thus, this transaction does not count in GDP.

Evaluate Transaction c

Roberto giving his daughter 50 dollars for her birthday is a private transfer of money and does not involve the exchange of goods or services. Thus, this transaction does not count in GDP.

Evaluate Transaction d

Latika selling 1,000 dollars of General Electric stock involves the transfer of existing wealth and financial assets rather than the production of new goods and services. Thus, this transaction does not count in GDP.

Evaluate Transaction e

Karen buying a new car reflects consumption of a new good. This transaction counts in GDP as it represents production and consumption within the economy.

Evaluate Transaction f

Amy buying a used car involves the resale of an existing good, which does not count towards GDP because it does not involve current production of goods or services.

Key concepts

Consumption

When discussing GDP, consumption refers to the spending by households on goods and services. These are the everyday purchases you make for things like food, clothing, and entertainment. Simply put, it’s the money you shell out to satisfy your personal needs and wants.

When Kerry buys a new sweater, this transaction is a classic example of consumption. It's a new good added to the economy, reflecting an active economic exchange. This is why it counts towards GDP.
Here are some key points about consumption:

• It includes spending on durable items, such as cars.
• It also includes non-durable goods, like food and clothing.
• Services, such as healthcare and education, also fall under consumption.

Understanding consumption helps you see how household spending is a driving force in economic activity.

Transfer Payments

Transfer payments are sums of money given by the government to individuals. These payments are not made in exchange for goods or services. They’re simple transfers of money and do not have a direct contribution to production.

Patricia receiving a Social Security check is an example of a transfer payment. Since there's no new good or service being produced, it doesn't count towards GDP.
Features of transfer payments include:

• They include welfare benefits, unemployment checks, and subsidies.
• These transactions don't directly stimulate the economy.
• They support individuals but don't reflect market exchanges.

Transfer payments are crucial for social welfare but have no immediate impact on GDP.

Investment Spending

Investment spending is all about the purchases businesses and some individuals make to generate future income. This involves spending on capital goods like machinery, buildings, and technology improvements. Investment spending is a critical component of GDP because it reflects current economic activity aimed at future economic benefits.

For instance, when businesses buy new equipment to enhance their production capabilities, that investment reflects economic growth.
Key aspects of investment spending include:

• It covers business expenses on capital goods to boost productivity.
• Residential construction and changes in company inventories are part of this.
• It is seen as an indicator of future economic performance.

Investment spending signifies ongoing and future economic vitality by contributing to the GDP through new and upgraded resources.

Market Value

Market value in the context of GDP refers to the total worth of goods and services produced, as evaluated by their price in the market. This measure signifies the economic activity level by quantifying the output produced domestically.

Each transaction contributing to GDP must involve the creation of new goods or services, indicating current production. For example, when Karen buys a new car, the market value of the car adds to GDP, as it signifies a new product created within the economy.
Consider the following points about market value:

• It’s calculated using the current prices to measure economic output.
• The focus is on newly produced goods and services during the period.
• Sales of used items or financial assets do not count towards GDP.

Understanding market value helps clarify which economic activities contribute directly to GDP, emphasizing current production.