What components of GDP (if any) would each of the following transactions affect? Explain. a. Uncle Fester buys a new refrigerator from a domestic manufacturer. b. Aunt Dolly hires a local contractor to build her a new house. c. The Huang family buys an old Victorian house from the Ellis family. d. You pay a hairdresser for a haircut. e. Ford sells a Mustang from its inventory to the Martinez family. f. Ford manufactures a Focus and sells it to Avis, the car rental company. g. California hires workers to repave Highway 66 h. The federal government sends your grandmother a Social Security check. i. Your parents buy a bottle of French wine. j. Honda expands its factory in Ohio.

Consumption is the largest component of a country's Gross Domestic Product (GDP), encompassing the total value of all goods and services purchased by households. This can range from everyday items like food and clothing to services such as salon visits and educational tuition fees. For example, Uncle Fester's purchase of a new refrigerator directly contributes to GDP under Consumption. Similarly, when you pay for a haircut, this service also falls into the Consumption category. It's essential to understand that for a transaction to be counted as Consumption, the goods or services must be new, as the resale of used goods does not contribute to current production and thus, GDP.

When analyzing GDP through Consumption, economists look for patterns and changes in consumer spending. This data can reflect the economic well-being of a society, as higher consumer spending is often associated with increased economic activity and growth. It's a real-time snapshot of the economy’s health.

Investment, within the context of GDP, refers to the purchases made by businesses on capital goods, and it also includes residential construction and inventory changes. These investments are not meant for immediate consumption but are used to create wealth in the future. For instance, Aunt Dolly's decision to hire a local contractor to build her a new house is categorized under Investment. Additionally, when a company like Ford sells a car to another business such as Avis for rental purposes, it is also considered Investment since it involves the purchase of new capital that can generate future income.

What Qualifies as Investment?

• New housing construction
• Business spending on equipment and infrastructure
• Purchases of goods to be used in future production (inventories)

These aspects of Investment indicate future economic expansion, as they are used to increase the productive capacity of the economy.

Government Purchases represent spending by government entities on goods and services that are used to provide public services or to invest in public infrastructure. This includes salaries of government employees, military spending, and infrastructure development. For example, when California hires workers to repave Highway 66, this spending is classified under Government Purchases. These outlays are distinct from transfer payments, such as Social Security, which do not correspond to immediate economic production and do not count in the GDP calculations.

Understanding how government spending impacts GDP is important since it can stimulate economic growth during periods of recession or underutilization of resources. Government Purchases are discretionary and can be adjusted according to economic policies designed to manage economic performance.

Net Exports measure the value of a country's exports minus its imports. It reflects the international trade balance and can either add to or subtract from the total GDP. When a country exports more than it imports, it has a trade surplus, positively impacting GDP. Conversely, a trade deficit, where imports exceed exports, will decrease GDP. The purchase of a bottle of French wine in our exercise, for instance, counts as an import and therefore will subtract from the Net Exports, diminishing the GDP.

Components of Net Exports:

• Exports: Sales of goods and services to foreign buyers
• Imports: Purchases of goods and services from abroad

Economic policies and currency exchange rates heavily influence net exports. Strengthening domestic industries and competitive exchange rates can lead to higher exports, boosting GDP through this component.