International Relation and Global Economy GDP Analysis

This economics assignment delves into the concept of Gross Domestic Product (GDP), exploring its components and calculations. The assignment begins by defining GDP and differentiating between expenditures included and excluded from its computation, such as transfer payments. It then analyzes various scenarios to determine which transactions contribute to GDP, including consumption, investment, government expenditure, and net exports. The assignment also examines the components of GDP, such as government purchases and net exports. Furthermore, it addresses the underground economy and its impact on GDP measurement. Finally, the assignment provides a table analyzing nominal GDP, real GDP, and the GDP deflator over several years, offering a practical application of the concepts discussed.

Running Head: INTERNATIONAL RELATION AND GLOBAL ECONOMY
International Relation and Global Economy
Name of the Student
Name of the University
Author note

1INTERNATIONAL RELATION AND GLOBAL ECONOMY
Table of Contents
Answer 1....................................................................................................................................2
Answer 2....................................................................................................................................2
Answer 3....................................................................................................................................3
Answer 4....................................................................................................................................4
Answer 5....................................................................................................................................5
Reference list..............................................................................................................................6

2INTERNATIONAL RELATION AND GLOBAL ECONOMY
Answer 1
Gross Domestic Product is the market value of all goods and services produced by a
nation in a given year. Goods and services produced in a particular year is only included in
GDP. With expenditure approach, all the expenditure made against produced goods or
services included in GDP. Expenditures that does not account any production is not a part of
GDP (Agénor and Montiel 2015). Now, transfer payments are expenditures made by
government to the individual without exchange of any goods or services. Hence, such
payments do not included in GDP.
Under the given scenario, Max receives an unemployment check. This is a part of
government transfer payment. Therefore, it will not counted in GDP. The spending made by
government for purchase of goods or service are considered in GDP computation. However,
the transfer payments only made for serving social purposes. As receivers of such payments
do not committed to provide any goods or services for the payments they are excluded from
GDP. The unemployment check received by Max is a part of unemployment benefit provide
by the government. Therefore, this payment should not be included in this year’s GDP.
Answer 2
a) You bought a new Wii at GameStop last year and resold it on eBay this year
This should not be included in GDP, as value of resold goods does not include in
GDP. Because of depreciation, this should not count in this year’s GDP.
b) You purchase an Investing for Dummies book at Barnes and Noble
The purchase of book is considered as a consumption expenditure and hence should
be included in this year’s GDP.
c) You purchase a historic home using the services of a real estate agent

3INTERNATIONAL RELATION AND GLOBAL ECONOMY
The purchase of historic home does not include in this year’s GDP as GDP includes
only goods produced in the current year. However, if any payment made to the agent for the
transaction then this would be included in GDP.
d) You purchase a tire to replace the damaged tire on your car
Tire is the final consumption good and as new tire is purchased to replace the old one
this spending will include in GDP.
e) You spend your Saturday cutting grass at your house
This will not include in GDP as cutting grass at own home is not a marketed goods or
service.
Answer 3
The four main components of GDP are consumption (C), Investment (I), government
expenditure (G) and net export (NX). The expenditure incurred in an economy are
categorized under these four major groups to include in GDP.
a) A tank purchased by the U.S. Army
The purchase of tank by US Army is the part of military expenditure of government.
This belong to the components of government expenditure (G).
b) Swiss chocolates imported from Europe
The Swiss chocolate imported from Europe is part of imported goods in the nation.
The net export component of GDP refers to export less import. Therefore, Swiss chocolate
imported from Europe belongs to net export (NX) components of GDP.
c) A new home
Purchase of home in regarded as residential investment. Hence, a new home belongs
to the Investment (I) components of GDP.

4INTERNATIONAL RELATION AND GLOBAL ECONOMY
d) A candy bar you purchase
Purchase of candy bars is a part of non-durable consumption goods. It is included in
GDP as a component of private consumption expenditure (C).
Answer 4
Gross Domestic Product of a nation is the marketed value of final goods and services
that a nation produces in a particular year (Bernanke, Antonovics and Frank 2015). GDP can
therefore only takes into account goods are services that are reported in the market.
Therefore, many activities in the economy have taken place outside the formal boundary of
market. GDP is supposed to be a measure of overall economic activity. Goods or services that
are sold in the economy but are not reported is considered as the underground or shadow
economy. The underground economy involves transaction activities not recorded to market or
government. This include either illegal activities or legal activities taken place without proper
license or tax payments. Example of legal activities in the underground economy include
income derived from self-employment (Heijdra 2017). The illegal activities involves drug
dealings, smuggling, trade of goods that are stolen, income from fraud and gambling. People
are encouraged to participate in underground economy driven by a number of factors.
Employers are involved in order to avoid government fees, license requirement and payroll
tax payments. People often forced to join underground economy, as they are unable to
participate in formal sectors. When effort has been made to include these activities in GDP
computation then this gives a more accurate outlook for GDP. Incorporation of transactions
taking place outside the market would increases GDP. With inclusion of all economic activity
will give a clearer picture of economy’s health (Mankiw 2014). The accounted GDP would
then increase because of an increase in accounted goods and service.

5INTERNATIONAL RELATION AND GLOBAL ECONOMY
Answer 5
GDP deflator= Nominal GDP
Real GDP ∗100
Year
Nominal
GDP Real GDP
GDP
deflator
2007 100000 111111.1
1 90
2008 113000 113000 100
2009 125000 114000 109.65
2010 150000 126050.4
2 119
2011 197200 145000 136

6INTERNATIONAL RELATION AND GLOBAL ECONOMY
Reference list
Agénor, P.R. and Montiel, P.J., 2015. Development Macroeconomics Fourth
edition. Economics Books.
Bernanke, B., Antonovics, K. and Frank, R., 2015. Principles of macroeconomics. McGraw-
Hill Higher Education.
Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.
Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.