318 PART 2 Macroeconomic Analysis Exercises Technical Questi

318 PART 2 Macroeconomic Analysis Exercises Technical Questions 1. Do government statisticians calculate GDP by sim ply adding up the total sales of all business firms in one year? Explain. 2. Evaluate whether all of the following are consid- ered to be investment (D in calculating GDP a. The purchase of a new automobile for private, nonbusiness use b. The purchase of a new house c. The purchase of corporate bonds 3. Explain whether transfer payments, such as Social Security and unemployment compensation, are counted as government spending in calculating GDP 4. Is it true that the value of U.S. imports is added to exports when calculating U.S. GDP because imports reflect spending by Americans? Explain.

Solution

Q1. No, the government statisticians do not calculate GDP by simply adding up the total sales of all business firms in one year.

This is because such simple addition of total sales of all business firms in one year gives rise to problem of double counting. Such double counting leads to exaggerated figure of GDP.

Many business firms sell their output to other business firms as intermediate goods or raw materials which the other business firms use to produce finished goods for final sale to consumers.

As value of goods sold by firms selling intermediate goods is incorporated in the value of finished goods sold, taking value in separate manner implies taking value of intermediate goods twice and this leads to problem of double counting and magnification of production.

So, what government statisticians do is that they calculate value – added by each firm. In other words, they subtract the value of intermediate goods from total sales of business firms and ascertain the value added by the respective firm.

Then they add the up such value added by all business firms in one year to ascertain GDP.

In this manner, problem of double counting is eliminated and true and fair value of GDP is calculated.