Sizing Up the Economy Using GDP-End of Chapter Problem For the transactions given determine if they contribute to the calculation of GDP as total spending and categorize them according to GDP component (Consumption, Investment, Government purchases, or Net exports). Consumption Investment Government purchases Net exports Not counted in GDP as final spending American consumers import 3.5 billion of woven apparel from Bangladesh Entrepreneur and Shark Tank investor Barbara Corcoran purchases 15% of Coins Maine Lorder food truck company for $55.000 The US government spends 5523.1 billion on national defense Michelin sells tires to Nissan to install on their 2019 Sentras that we produced and sold in the United States Molly Maid provides house cleaning services across the United States Answer Bank
The Correct Answer and Explanation is:
Let’s categorize each transaction according to its contribution to GDP (Gross Domestic Product) and specify the GDP component it belongs to. GDP measures the market value of all final goods and services produced within a country in a given period.
Transactions and GDP Classification:
- American consumers import \$3.5 billion of woven apparel from Bangladesh
- Category: Not counted in GDP as final spending (or considered a subtraction under Net Exports)
- Explanation: Imports are not included in the U.S. GDP because they are not produced domestically. In GDP accounting, imports are subtracted from total spending to avoid overstating the value of domestic production.
- Barbara Corcoran purchases 15% of Coins Maine Lorder food truck company for \$55,000
- Category: Not counted in GDP as final spending
- Explanation: This is a financial investment, not an economic investment in physical capital like equipment or structures. Purchasing ownership or equity does not reflect the production of new goods or services, so it does not count toward GDP.
- The US government spends \$523.1 billion on national defense
- Category: Government Purchases
- Explanation: Government expenditures on goods and services such as defense, education, and infrastructure are counted in GDP under Government Purchases. Defense spending represents a direct government consumption of resources within the economy.
- Michelin sells tires to Nissan to install on their 2019 Sentras that were produced and sold in the United States
- Category: Not counted in GDP as final spending
- Explanation: The tires are an intermediate good—they are part of the production process for a final good (the car). GDP only includes final goods and services to avoid double counting.
- Molly Maid provides house cleaning services across the United States
- Category: Consumption
- Explanation: House cleaning services are final services purchased by households, which falls under the Consumption component of GDP. These are part of consumer spending on services.
Summary Table:
| Transaction | GDP Category |
|---|---|
| American consumers import \$3.5B of apparel from Bangladesh | Net exports (negative contribution) |
| Barbara Corcoran buys 15% of food truck company | Not counted in GDP |
| US government spends \$523.1B on national defense | Government purchases |
| Michelin sells tires to Nissan (for car assembly) | Not counted in GDP (intermediate good) |
| Molly Maid provides house cleaning services | Consumption |
Final Note:
GDP is a measure of economic output, not financial flows or asset transfers. It emphasizes current production of final goods and services within a country’s borders. Only transactions that reflect new production and final use contribute directly to GDP.