Question

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

a. A woman who makes a living charging for investment advice on her Internet Web site marries one of her clients, to whom she now provides advice at no charge.

b. A man who had washed the windows of his own house every year decides to pay a private company to wash those windows this year.

c. A company that had been selling used firearms illegally finally gets around to obtaining an operating license and performing background checks as specified by law prior to each gun sale.

Short answer

Situation a:

As a result, her free service, which would normally be paid.

Situation b:

The amateur is unemployed, and winning a trophy

Situation c:

Current year's GDP, legitimate sales of used fire guns will have no impact on GDP.

Step-by-step solution

Step 1:     Situation a

a) In this scenario, because the woman delivers her services to her client and spouse for free, she is not contributing to the GDP.

As a result, her free service, which would normally be paid, diminishes the measured GDP.

Step 2:     Situation b

b) In this case, the amateur is unemployed, and winning a trophy raises the measured GDP.

Step 3:     Situation c

c) Because used sales of any consumer or capital good are not included in the current year's GDP, legitimate sales of used fire guns will have no impact on GDP.