Question

How does GDP accounting record the following events? For each of them, describe how they would be computed in GDP accounts using the income method, the production method, and the expenditure method.

a. Tom purchases a brand new Volkswagen from Germany for his start up ride sharing business for $20,000. He provides ride-sharing services earning him revenues of $40,000. During the course of the year, the Volkswagen depreciates by $2,000. Tom has no other costs.
b. An army battalion is deployed to the border to repel a threatened Canadian invasion. The soldiers earn wages of $10,000 and use ammunition that the government bought for $5,000. The ammunition was produced using $2,000 of imported steel and 100 hours of work, for which the workers were paid $1,000. Hint: two things are produced in this example, what is the value added for each of them?
c. The government collects $1000 in income taxes from Pam.
d. Pam earns $4000 for working as a babysitter and pays $1000 in income taxes.

Answer 1

a. Tom purchases a brand new Volkswagen from Germany for his start up ride sharing business for $20,000. He provides ride-sharing services earning him revenues of $40,000. During the course of the year, the Volkswagen depreciates by $2,000. Tom has no other costs.

GDP increases by $20,000:

It will increase $40,000 by the services provided (consumption) but will decrease $20,000 due to the imported car (negative net exports).

b. An army battalion is deployed to the border to repel a threatened Canadian invasion. The soldiers earn wages of $10,000 and use ammunition that the government bought for $5,000. The ammunition was produced using $2,000 of imported steel and 100 hours of work, for which the workers were paid $1,000. Hint: two things are produced in this example, what is the value added for each of them?

GDP increases by $13,000:

Government spending increases by $15,000.

Net imports decrease by $2,000.

c. The government collects $1000 in income taxes from Pam.

GDP doesn't change. Taxes are not included in the GDP

d. Pam earns $4000 for working as a babysitter and pays $1000 in income taxes.

GDP increases by $4,000 (consumption).