1 Question I – GDP Accounting
For each of the following, describe how the transactions would affect the GDP accounts of the relevant countries
using the income method, the production method and the expenditure method.
(a) The US exports $100 in solar panels to Japan that are used in homes. Japan exports $100 to in cars to the US.
Of these, 50% are stored in warehouses while the other 50% are sold at price. Report the accounting in both
(b) The Russian army has invaded Ukraine. Russian soldiers earn wages of 10,000 Rubles each and use ammunition
that the government buys for 5,000 Rubles. The ammunition is produced using 2,000 Rubles of imported steel
and 100 hours of work by Russian workers; these Russian workers are paid 1,000 Rubles in total. Do the GDP
accounting. Now assume that had Russia not invaded Ukraine, soldiers would have still been paid but the
ammunition would have not been produced. Would the GDP in Russia have been higher or lower?
(c) The retail company Levi Strauss sells 1000 jeans for a total value of $100,000 to Macy’s. Macy’s sells the jeans
for $120 each. Say Levi’s sells 50% of its inventory. Compute the effect on GDP. Next, suppose each pair of
jeans in Levi’s inventory is downgraded, such that each pair is worth only half of what it was valued before.
Compute the contribution to GDP in this scenario.
(d) Assume a 16 year old named William Gates writes a computer program in his garage. The software is stored in
his hardware. What is his contribution to GDP? Now, instead assume William Gates incorporates a company
called Microsoft, with himself as the only employee. Any production cost is attributed to his salary. He still
works in his garage. He creates the same computer program. Suppose he values the computer program for
$20,000. What is the contribution to GDP? What is the money that Bill Gates gets in his bank account by
the end of the year and how much is registered as salaries?
(e) Jeremy buys a house for $50,000. When is the transaction part of GDP?