Paolo and Sharon Zambetti live in Conshohocken, PA. Sharon’s father, Van, lives in Sweden. For each of the following transactions that occur in their lives, identify whether it is included in the calculation of U.S. GDP as part of consumption (C), investment (I), government purchases (G), exports (X), or imports (M). Check all that apply.
Transaction:
The Pennsylvania Department of Transportation, a state administration, fixes potholes along PA highway 23, which feeds into the center of Conshohocken.
Paolo buys a sweater made in Guatemala.
Sharon gets a new refrigerator made in the United States.
Sharon’s father in Sweden orders a bottle of Vermont maple syrup from the producer’s website.
Paolo’s employer upgrades all of its computer systems using U.S.-made parts.
The correct answer and explanation is :
Categorization of Transactions in U.S. GDP Calculation
- The Pennsylvania Department of Transportation fixes potholes along PA highway 23.
- Category: Government Purchases (G)
- Explanation: Government purchases (G) include spending by federal, state, and local governments on goods and services. Since the Pennsylvania Department of Transportation is a state agency, its spending on infrastructure repairs, such as fixing potholes, counts as government purchases. This spending is included in GDP because it reflects government consumption of resources to provide public services.
- Paolo buys a sweater made in Guatemala.
- Category: Consumption (C) and Imports (M)
- Explanation: Paolo’s purchase is considered consumption (C) because it is a personal expenditure on clothing, a final good. However, since the sweater was made in Guatemala, it is classified as an import (M), which means it does not contribute to U.S. GDP. Imports are subtracted from GDP because they represent spending on foreign-produced goods rather than U.S. domestic production.
- Sharon gets a new refrigerator made in the United States.
- Category: Consumption (C)
- Explanation: Sharon’s purchase of a U.S.-made refrigerator is counted under consumption (C) because it is a final good purchased by a household. Since it was produced domestically, it contributes to GDP.
- Sharon’s father in Sweden orders a bottle of Vermont maple syrup.
- Category: Exports (X)
- Explanation: When a foreigner purchases a U.S.-produced good, it counts as an export (X) because it increases demand for U.S. production. Exports contribute positively to GDP since they reflect goods produced domestically and sold abroad.
- Paolo’s employer upgrades all its computer systems using U.S.-made parts.
- Category: Investment (I)
- Explanation: Business purchases of equipment and technology upgrades are considered investment (I) because they enhance productive capacity. Since the parts are made in the U.S., this expenditure contributes directly to GDP.