Suppose that in 2015, geologist discover large reserves of oil under the tundra

Question

Suppose that in 2015, geologist discover large reserves of oil under the tundra in Alaska. These reserves have a market value estimated at $50 billion at current oil prices. Oil companies spend $1 billion to hire workers and move and position equipment to begin exploratory pumping during that same year. In the process of loading some of the oil onto tankers at a port, one company accidentally spills some of the oil into a bay and by the end of the year pays $1 billion to other companies to clean it up. the oil spill kills thousands of birds, seals, and other wildlife.

The combined effect of these events on GDP for the year 2015 was

a. $51 billion

b. $2 billion

c. $1 billion

d. $52 billion

The loss in national welfare will

a. lower GDP since it is non-market transaction and thus is included in GDP.

b. not be reflected in GDP since it is a non-market transaction and thus is not included in GDP

c. lower GDP since it is a market transaction and thus is included in GDP

d. not be reflected in GDP since it is a market transaction and thus is not included in GDP

Explanation / Answer

Part A : Option c) $1 billion
GDP is given as:: GDP = Consumption + Government Expenditures + Investment + Exports - Imports
GDP = $1 billion = Investment to hire workers and move and position equipment to begin exploratory pumping during that same year
Source: http://thismatter.com/economics/gross-domestic-product.htm

Part B : Option b) not be reflected in GDP since it is a non-market transaction and thus is not included in GDP
Source: http://www.williampolley.com/blog/archives/2009/08/gdpnot-a-good-m.html

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