Question

Which of the following transactions will be included in GDP for the United States? a. Coca-Cola builds a new bottling plant in the United States. b. Delta sells one of its existing airplanes to Korean Air. c. Ms. Moneybags buys an existing share of Disney stock. d. A California winery produces a bottle of Chardonnay and sells it to a customer in Montreal, Canada. e. An American buys a bottle of French perfume in Tulsa. f. A book publisher produces too many copies of a new book; the books don't sell this year, so the publisher adds the surplus books to inventories.

Short answer

Transactions included in US GDP are: a. Coca-Cola builds a new plant, d. A winery produces and sells a bottle of wine, and f. A publisher adds unsold books to inventories.

Step-by-step solution

Understanding GDP

Gross Domestic Product (GDP) measures the value of all finished goods and services produced within a country's borders in a specific time period. It includes only new production, not the transfer or resale of existing items.

Assessing each transaction

We evaluate each transaction to determine if it is the production of a new good or service within the United States.

Analyzing Transaction a

Coca-Cola's construction of a new bottling plant in the United States is included in GDP as it is an investment in new productive capacity.

Analyzing Transaction b

Delta's sale of an existing airplane to Korean Air is not included in GDP, as it is simply a transfer of a used good.

Analyzing Transaction c

Ms. Moneybags buying existing shares of Disney stock is a financial transaction, not the production of a new good or service, hence not included in GDP.

Analyzing Transaction d

The California winery's production and sale of a bottle of Chardonnay, even if sold to someone in Canada, is included in GDP as it's a US-made product.

Analyzing Transaction e

An American buying a bottle of French perfume in the United States represents an imported good, so this spending is not included in the US GDP.

Analyzing Transaction f

The book publisher's addition of surplus books to inventory is included in GDP as an investment in inventory, which represents production that occurred even if it wasn't sold.

Key concepts

National Income Accounting

National Income Accounting is the system used by a country to keep track of all its economic activities. Think of it like a financial ledger for an entire nation, keeping score of production, consumption, saving, and investment. It allows economists and policy makers to assess the health of an economy by providing crucial information about the country's gross domestic product (GDP), national income, and the various components that make up these aggregates.

For example, when we consider transaction a, Coca-Cola's construction of a new plant, this is a form of capital investment and adds to the robust collection of economic activities recorded within this accounting system. On the other hand, transaction c, the purchase of existing shares, doesn't create new production so it isn't recorded in this context. Focusing on national income accounting helps us to segregate economic activities that contribute to the nation's income from those that do not.

Economic Indicators

Economic indicators are like vital signs for the economy. They help us understand how healthy it is and give us insight into where it might be headed. GDP is one of the most prominent indicators and looks at all new goods and services produced. Other examples include unemployment rates, inflation, and trade deficits.

When examining the transactions from the exercise, knowing which contribute to GDP gives us insight into economic wellbeing. For instance, incomes generated from domestically produced goods (as in transaction d, the bottle of Chardonnay) reveal an active production economy, while data on imported goods (like the French perfume in transaction e) show consumer preferences and impact trade balances. Investment in inventory as seen in transaction f can indicate future production trends or consumer demand forecasts.

Investment in Inventory

The investment in inventory is a key economic activity that counts toward GDP. It includes goods that have been produced but not yet sold, highlighting that resources have been used for production. This investment can indicate economic optimism if inventories are building up in anticipation of future sales.

For instance, the surplus books from transaction f are considered an investment. The publisher expects these books to eventually sell, contributing to future economic activity. This contrasts with resale activities, such as selling used goods, which do not represent new production and therefore do not factor into GDP contributions.

Production of Goods and Services

At the heart of Gross Domestic Product calculations is the production of goods and services within a country. It reflects the sum of human activities in production facilities (like factories, farms, and offices) and the value they add. Transactions that involve new production are prime components of GDP.

For example, Coca-Cola's investment in a new plant (transaction a) and the creation of Chardonnay by a winery (transaction d) directly relate to the production of goods. This is fundamental production that showcases economic vitality, directly impacting the level of employment, income, and technological progression within an economy.