Question

Explain what happens to the official measure of GDP in each of the following situations.

a. Air quality improves significantly throughout the United States, but there are no effects on aggregate production or on market prices of final goods and services.

b. The U.S. government spends considerably less on antipollution efforts this year than it did in recent years.

c. The quality of cancer treatments increases, so patients undergo fewer treatments, which hospitals continue to provide at the same price per treatment as before.

Short answer

Option a:

The official GDP measurement will remain unchanged.

Option b:

The official measure of GDP will be reduced if government spending is cut.

Option c:

A decrease in them lowers the official GDP figure.

Step-by-step solution

    Explanation of option a

a) Gross domestic product (GDP) is the total market value of all final products and services produced in a given year.

Assume that the quality of the air increases; the GDP will not be affected if the quality of the air, or any other good or service, does not increase in market value.

As a result, the official GDP measurement will remain unchanged.

    Explanation of option b

b) Air pollution spending in the United States is included in government spending and is a component of GDP computation. The official measure of GDP will be reduced if government spending is cut.

   Explanation of option c

c) As the quality of cancer therapies improves, there are fewer cancer re-treatments, as medical services are consumed by consumers, and a decrease in them lowers the official GDP figure.