Econ 1, Fall 2010
Problem Set 1 Solutions
University of California, Berkeley
Page 1 of 10
Problem Set #1 Solutions
Explain whether or not, why, and how the following items are included in the calculation of GDP:
Increases in business inventories.
Increases in business inventories are counted in the calculation of GDP so that new goods that
are produced but go unsold are still counted in the year in which they are produced.
Specifically, they count in
Fees earned by real estate agents on selling existing homes.
While the sale of existing homes is not counted in GDP (since the homes weren’t produced
during the year in question), the service rendered by real estate agents needs to be counted.
Thus the fees earned by real estate agents does count in the calculation of GDP, even when
the transaction brokered is for an existing home.
Social Security checks written by the government.
Social Security checks written by the government do not count in GDP, since they do not
involve the production of any good or service.
More generally, transfers (or transformations)
of wealth do not count in the calculation of GDP.
Building of a new dam by the Army Corps of Engineers.
The goods and services purchased by the government to build the dam will count in the
calculation of GDP (in
), but the value added over and above the cost of labor and materials
is not counted.
An economist earning $2,000 by giving a speech to members of San Francisco's Commonwealth
An economist earning $2,000 by giving a speech to San Francisco’s Commonwealth Club is
producing a service, and the fee will be counted in the calculation of GDP (specifically, in
Interest that your parents pay on the mortgage they have on their house.
Like all interest paid by households and the government, interest on a homeowner’s mortgage
is not counted in the calculation of GDP since it is not assumed to flow from the production of
goods and services.
Purchases of foreign-made trucks by American residents.
Purchases of foreign-made trucks by American residents are counted in the calculation of
GDP, since the departure of income from the U.S. economy to economies abroad must be
They enter GDP negatively through the category
and positively through
depending on whether households, firms, or government agencies are making the
If the magnitude of IM and C, I, or G is the same these will cancel out, which makes sense,
since GDP is a measure of domestic production, not foreign production.
In reality, C, I, or G
may be slightly greater than IM in magnitude, since the final price of the trucks reflects the
costs of U.S. distributors and retailers.
The net contribution to GDP would be positive due to
the production of these services.