Question

Which of the following items will be included in official U.S. GDP statistics?Select one or more answers from the choices shown. a. Revenue generated by illegal marijuana growers in Oregon. b. Money spent to clean up a local toxic waste site in Ohio. c. Revenue generated by legal medical marjjuana sales in California. d. The dollar value of the annoyance felt by local citizens living near a noisy airport in Georgia. e. Robert paying Ted for a haircut in Chicago. f. Emily and Rhonda trading an hour of dance lessons for a haircut in Dallas.

Short answer

Items b, c, and e are included in official U.S. GDP statistics.

Step-by-step solution

Understanding GDP

Gross Domestic Product (GDP) measures the value of final goods and services produced within a country during a specific period. It only includes activities with a market transaction that can be legally documented.

Evaluating Illegal Activities

Illegal activities, such as revenue from illegal marijuana sales, are not included in the official U.S. GDP statistics, as they are neither legally documented nor part of the official market.

Analyzing Government Spending

Money spent by the government, like cleaning a toxic waste site, is included in GDP as government spending, since it involves monetary transactions contributing to public services.

Legal Market Transactions

Revenue generated by legal sales, such as medical marijuana in California, is included in GDP because these are part of the documented and legal market activities.

Excluding Non-Market Values

Non-market values, such as the environmental annoyance or the perceived cost of noise, are not included in GDP since no actual transaction occurs.

Personal Service Transactions

Personal transactions for services paid in cash, like Robert paying for a haircut, are included in GDP because they involve market transactions.

Bartered Exchanges Without Monetary Transaction

Barter or trade exchanges, such as trading services for another service without money, are not counted in GDP as there is no monetary transaction involved.

Key concepts

Market Transactions

When discussing Gross Domestic Product (GDP), market transactions play a crucial role in its calculation. Market transactions are economic activities where goods or services are exchanged for money. These exchanges occur within a legal and documented setting, ensuring transparency and traceability. For a transaction to be considered in GDP, it must be:

• Legal: Transactions must comply with the law. Illegal activities, even if they generate income, are not included in GDP.
• Documented: Transactions must be recorded formally, facilitating their traceability via receipts or invoices.
• Occurring within the country: Only transactions that take place within the borders of a nation are part of its GDP.

For instance, Robert paying Ted for a haircut in Chicago is a market transaction. This means it is legal, monetarily measured, and falls within U.S. boundaries, so it is counted in the GDP.

Government Spending

Government spending is a vital component of GDP, reflecting the role of government activities in the economy. It includes money spent on goods and services that provide public benefits. Such spending contributes to GDP as it directly involves fiscal resources to support the economic infrastructure. Considerations for inclusion in GDP as government spending include:

• Public Services: Expenditures that enhance public welfare, such as infrastructure projects, education, or healthcare. Clean-up efforts, like dealing with a toxic waste site, are a part of this.
• Defense and Security: Allocations for maintaining national security and safety.
• Administrative Expenses: Costs related to the functioning of government bodies and agencies.
• Legality and Traceability: The spending needs to be authorized and documented through official channels.

Spending on cleaning a toxic waste site in Ohio thus contributes to GDP as it represents government spending on public welfare and involves monetary transactions.

Illegal Activities

Illegal activities, regardless of the economic value they might add, are excluded from GDP calculations. This exclusion arises because such activities fail to meet the two essential criteria for GDP consideration: legality and documentation. Here are more details on why illegal activities are omitted:

• Lack of Legal Framework: Revenue from activities like illegal marijuana sales is unregulated, bypassing official economic oversight.
• Absence of Documentation: Transactions from illegal dealings do not feature in documented financial records, making them invisible to legitimate economic analysis.
• Economic Statistics Impact: Including illegal activities could distort the understanding of an economy’s legitimate growth and productivity.

In the case of illegal marijuana growers in Oregon, despite the revenue generated, these are not recognized in official GDP metrics due to their unlawful nature.

Non-Market Values

Non-market values represent the worth of goods or services for which no market transaction occurs, and they are omitted from GDP calculations. Unlike market transactions, where value is assigned through exchange in a legal framework, non-market values stem from intangible aspects, such as personal satisfaction or social factors. Here’s why they are excluded:

• Lack of Tangible Exchange: No financial exchange takes place, making these values hard to quantify in monetary terms.
• Subjectivity: Values like annoyance or personal satisfaction vary wildly amongst individuals, offering no standard measure.
• Challenge in Measurement: Estimating these values in a standardized manner is impracticable without a corresponding transaction.

For example, the annoyance from noise pollution near a Georgia airport does not enter GDP calculations. This is because it doesn't result in an exchange of money, and its impact is subjective.