Chapter 10 Question 3 Categories of expenditures Solution
Paolo and Sharon Zambetti live in Swarthmore, PA. Their son, Van, is an artist living in New Yor
... [Show More] k City.
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 C I G X M
Sharon buys a new BMW, which was assembled in
Germany.
The Zambettis build an addition on their house.
Sharon gets a new refrigerator made in the United
States.
Van paints a landscape and sells it to an art collector in
Japan.
The Federal Aviation Administration expands the
runways at Philadelphia International Airport, which is
just a few miles from Paolo and Sharon's house.
Points:
1 / 1
Close Explanation
Explanation:
Consumption consists of expenditures by individuals on goods and services, such as the new
refrigerator made in the United States that Sharon buys and the BMW that Sharon buys (see the
imports explanation in this problem as well).
Investment consists of spending on capital goods, household purchases of new housing, and (net)
additions to inventories. Because a house is a capital good, an improvement to a house is considered
investment spending.
Government purchases consist of any purchase by a state, local, or federal government. Therefore,
when the Federal Aviation Administration expands the runways at Philadelphia International Airport,
that is considered part of government purchases.
A product’s inclusion in one category does not necessarily imply that it is excluded from other
categories. When a good is sent across national boundaries or when a service is provided by a
company in one country for a company in another country, the value of that good or service is
included in the exports category for the country in which the good or service originated and in
the imports category for the country that receives the good or service. For example, when Sharon
buys a new BMW, the value of the BMW is added to the exports category for Germany and the imports
category for the United States. Furthermore, because the BMW is bought in the United States, it is
also included in the consumption category, as mentioned previously. (Note: The net effect on U.S.
GDP is the value added by the U.S. retailer.)
On the other hand, when Van paints a landscape and sells it to an art collector in Japan, the value of
the painting is added to the exports category for the United States and the imports and consumption
categories for Japan. [Show Less]