Question

Assume that the total value of the following items is \(600 billion in a specific year for Upper Mongoose: net exports = \)50 billion; value of new goods and services produced in the underground economy = \(75 billion; personal consumption expenditures = \)300 billion; value of the services of stay-at-home parents = \(25 billion; gross domestic investment = \)100 billion; government purchases = $50 billion. What is Upper Mongoose’s GDP for the year? What is the size of the underground economy as a percentage of GDP? By what percentage would GDP increase if the value of the services of stay-at-home spouses were included in GDP?

Short answer

Upper Mongoose’s GDP for the year is $500 billion.

The underground economy is 15% of the GDP.

If the value of stay-at-home parents service was included, the GDP would have increased by 5%.

Step-by-step solution

Upper Mongoose’s GDP

According to expenditure method, GDP = C + I + G + NX.

The value of the underground economy is not included because it is an illegal economy and is not accounted for in records. At the same time, the value of stay-at-home services is not included because they are not selling any service in the market and are not generating income.

GDP = (300 + 100 + 50 + 50) billion USD

GDP = $500 billion

Therefore, Upper Mongoose’s GDP for the year is $500 billion.

Percentage of the underground economy

$$\begin{gathered} PercentageofUndergroundEconomy=\frac{ValueofUndergroundEconomy}{GDP}\times 100 \\ =\frac{75}{500}\times 100 \\ =15\% \end{gathered}$$

Thus, the value of the underground economy is 15% of Upper Mongoose’s GDP.

Percentage increase in income due to inclusion of  stay-at-home parents services

If the value of stay-at-home services was to be included, the GDP would have increased by some percentage.

$$\begin{gathered} PercentageofStayathomeparentsservices=\frac{ValueofStayathomeservices}{GDP}\times 100 \\ =\frac{25}{500}\times 100 \\ =5\% \end{gathered}$$

The value of stay-at-home parents services would have increased the GDP by 5%.