ECO 202, Lyons
PROBLEM SET 1 DISCUSSION SHEET
TEXT, CHAPTER 4:
Contribution of 100 computers worth $1,000 each to GDP, by two methods.
Value of final products: 100 • $1,000 =
Value added by stages of production/distribution.
1a. Intelligence, Inc. : 100 chips @ $200 - cost of inputs = 100 • $200 - 0 = $
1b. Macrosoft: 100 softwares @ $50 - costs of inputs = 100 • $50 - 0 =
2. Bell computers: 100 computers @ $800 - 100 ($200 chip + $50 software)
= $80,000 - $25,000
3. PC Charlie’s: 100 computers @ $1,000 - 100 ($800 computer at wholesale)
= $100,000 - $80,000
Sum of values added (
to value of final product)
A frequent error is not to include the value added of the software.
Effects of various transactions on GDP and its expenditure components.
Mother-in-law’s purchase of a new US-made car increases US GDP and consumption
expenditures by the price of the car.
Purchase of car from Sweden raises consumption expenditure by price of the car, and
increases imports by the price of the car. An increase in imports with no change in exports makes
net exports smaller by the price of the car. The increase in consumption exp. and the decrease in
net exports are offsetting, and GDP does not change.
Purchase of car by the rental company increases the GDP by the price of the car, and increases
investment by the same amount.
Purchase of the Swedish car by the rental company increases imports (and reduces net
exports) by the price of the car, and increases investment by the same amount. Net effect on
GDP is zero, as in b).
Government’s purchase of a new US-made car for use in Sweden by Ambassador mother-in-
law increases US GDP and government expenditures by the price of the car. [The car is not
exported, because it is not sold to a foreign person or other foreign entity.]
Table 4.2 (p. 106) in the text provides guidance on how to deal with this GDP calculation.
Ascertain the four major expenditure components of GDP.
: (This is a total that
household purchases of durables.)
(Sum of residential construction at $100, business fixed investment at $100,
and inventory investment at $25 (year-end at 125 less year beginning at 100)
sales of existing homes, since they were produced in an earlier year, do not count;
in this instance, brokers’ fees are ignored (not included in the data provided)
government purchases of goods and services
Payments to retirees are transfer payments, and do not represent current production.
exports (75) less imports (50)
(sum of the four components)