Macroeconomics Theory Question?

Question

Suppose that instead of cooking dinnar for an hour, you decide to work an extra hour, earning an additional $12. You then buy some food for $10.

a. By how much does mesaured GDP increase?
b. Does true GDP increase or decrease? Explain.

Answer 1

a. it's best you approach this question from the income apporach:

GDP = tax + personal income + capital income

since your income increases by 12, the GDP goes up by 12.

b. yes, since there was consumption used, and the increase was not due to raise of price level.

Answer 2

GDP is measured as: consumption + investment + government spending + (exports − imports).

So, there are several possible answers.

1.) If you are a government employee or contractor, then you are causing $12 (or more, for a contractor) in government spending, and then increasing consumption by $10. Investment, exports, and imports are not affected, so the measured GDP increases by $22.

2.) If you are not a government employee or contractor, then you are only increasing consumption by $10. Investment, exports, and imports are not affected, so the measured GDP increases by $10.

3.) If you invest the remaining $2, then the measured GDP in both scenarios goes up by $2.

The true GDP does increase, as you would not have consumed the $10 in food had you not eaten out.