Fundamentals of Economics

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Q.: 1: The manuscript for this book was typed for free by a friend. Had I hired a secretary to do the same job, GDP would have been higher, even though the amount of output would have been identical. Why is this? Does this make sense? A.: 1: If a secretary were hired to type the manuscript, they would have had the opportunity to provide a service at a price. We know that each good and service produced and brought to market has a price. That price serves as a measure of value for calculating total output; in this case, the task of completing the typing for this book. GDP is the total market value of all final goods and services produced within a nation’s borders in a given time period. If the job was undertaken by the secretary, the market price of the service provided would have been included in the calculation of the nation’s GDP for that year. Because the manuscript was typed by a friend, there was no exchange of money. GDP = C + I + G + (X – M) where;

GDP = Gross Domestic ProductC = Consumption
I = InvestmentG = Government Spending
X = Total value of goods exported out of the nation in the given time period M = Total value of goods imported into the nation in the given time period Because GDP reflects a summation of all individual consumption, investment and trade portions of the economy, the above scenario leads to a cascading impact on the overall GDP. Impact on Consumption: If the secretary received the money for services provided, it would have resulted in increased buying power for them. Increased purchasing power leads to increase in consumption; an important factor in the calculation of a nation’s GDP. Increased purchasing power also creates a positive impact on the standard of living of individuals that can eventually push the demand curve outward. Impact on Government Spending: With the exchange of money for the exchange of services, an element of the entire transaction could have resulted in an increase in the taxes owed to the...
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