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Chapter 8: Q. 9 (page 186)

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

Expert verified

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

01

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.

02

Step 2:     Situation b

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

03

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.

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Most popular questions from this chapter

Suppose that early in a year, a hurricane hits a town in Florida and destroys a substantial number of homes. A portion of this stock of housing, which had a market value of \(100 million (not including the market value of the land), was uninsured. The owners of the residences spent a total of \)5 million during the rest of the year to pay salvage companies to help them save their remaining belongings. A small percentage of uninsured owners had sufficient resources to spend a total of \(15million during the year to pay construction companies to rebuild their homes. Some were able to devote their own time, the opportunity cost of which was valued at \)3 million, to work on rebuilding their homes. The remaining people, however, chose to sell their land at its market value and abandon the remains of their houses. What was the combined effect of these transactions on GDP for this year? (Hint: Which transactions took place in the markets for final goods and services?) In what ways, if any, does the effect on GDP reflect a loss in welfare for these individuals?

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.

Explain in your own words why the flow of gross domestic product during a given interval must always be equivalent to the flow of gross domestic income within that same period.

Why might current intangible investments in recorded music by Katie Perry or Rihanna be harder to measure with greater precision today than long-past investments in the recorded music of, say, Elvis Presley in the 1960 s or Elton John in the 1970s? (Hint: Is it easier to project forward or to look back at past data?)

Which of the following activities of a computer manufacturer during the current year are included in this year's measure of GDP?

a. The manufacturer produces a chip in June, uses it as a component in a computer in August, and sells the computer to a customer in November.

b. A retail outlet of the firm sells a computer completely built during the current year.

c. A marketing arm of the company receives fee income during the current year when a buyer of one of its computers elects to use the computer manufacturer as her Internet service provider.
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