Answer to Question #223219 in Macroeconomics for kumi

Question

Analyze how much Pakistan’s GDP and each of its components is affected by the following transactions? Explain your answers (2 Marks, Maximum 200 words).

                   i.     Bank Al Habib issues new shares to finance the construction of an office in Sukkur, Sindh.

                 ii.     Sadia spends 50000 on a computer to use in her editing business in Karachi. She got last year’s model on sale for a great price from a local manufacturer. 

               iii.     You mother spend weekend cleaning your apartment.

Your brother pays a shopkeeper to buy a laptop in Karachi

Answer 1

(i) Bank Al Habib issuing new shares won't have any impact on Pakistan's GDP because selling shares simply implies transfer of ownership from one person to the other. Total output remains unchanged leading to no change in GDP. However, construction of a new office by the bank will generate investment demand in the form of demand for new construction materials, workmen, new employees will have to be hired in order to run the office, etc. All these will increase income, output and employment, and hence GDP will increase as a result.

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(ii) In this case, Sadia spends 50,000 on a computer to use in her editing business. But since the computer is a model of the previous year, it is not a part of the stock of goods produced in this year. Hence this transaction will have no effect on GDP.

(iii) If mother spends weekend cleaning the apartment, then this will have no effect on GDP as she won't be paid for her service. Had she spent the time for some service outside her house for which she would have received money, then that would have been a part of GDP.

If brother spends money to buy a laptop, then this will increase the consumption demand component of GDP as the laptop is a consumer durable good. Hence GDP will increase.