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 :
Let’s analyze each transaction and determine whether it’s part of U.S. GDP and which category it falls under:
- The Pennsylvania Department of Transportation, a state administration, fixes potholes along PA highway 23, which feeds into the center of Conshohocken.
- Category: Government Purchases (G)
Government purchases include spending by local, state, and federal governments on goods and services. Here, the Pennsylvania Department of Transportation is spending money on repairing public infrastructure (the highway), which is a government expenditure. This is part of U.S. GDP as government spending.
- Paolo buys a sweater made in Guatemala.
- Category: Imports (M)
When Paolo buys a sweater made in Guatemala, this transaction involves an imported good. Imports are subtracted from U.S. GDP, as GDP only measures goods and services produced within the country. Therefore, the purchase of an imported sweater falls under the “Imports” category and reduces the overall GDP.
- Sharon gets a new refrigerator made in the United States.
- Category: Consumption (C)
This transaction is a purchase of a new refrigerator, which is a durable good. Since it is bought by a U.S. consumer (Sharon) and produced within the U.S., it falls under the “Consumption” category of U.S. GDP. Consumption refers to all goods and services purchased by households.
- Sharon’s father in Sweden orders a bottle of Vermont maple syrup from the producer’s website.
- Category: Exports (X)
When Sharon’s father, who lives in Sweden, buys a product made in the U.S. (Vermont maple syrup), this constitutes an export from the U.S. to Sweden. Exports are added to U.S. GDP because they represent goods produced domestically but sold to foreign consumers.
- Paolo’s employer upgrades all of its computer systems using U.S.-made parts.
- Category: Investment (I)
The purchase of computer systems by Paolo’s employer is an example of business investment. Business investment includes expenditures on capital goods like equipment and software. Since the computer systems are being upgraded using U.S.-made parts, this transaction is included in GDP as part of investment, which is a key component of GDP.
Summary:
- The first transaction is part of Government Purchases (G).
- The second transaction is part of Imports (M).
- The third transaction is part of Consumption (C).
- The fourth transaction is part of Exports (X).
- The fifth transaction is part of Investment (I).