With each of the following examples, please explain what happens to contribution

Question

With each of the following examples, please explain what happens to contributions to GDP and economic growth in each of the following statements:
a. A woman who makes a living charging for investment advice on her Internet website marries one of her clients, to whom she now provides advice at no charge.
b. A tennis player wins two top professional tournaments as an unpaid amateur, meaning the tournament sponsor does not have to pay out his share of prize money.
c. A public utility installs new antipollution equipment in its smokestacks.

Explanation / Answer

Economic growth is just the change in GDP. So, this question only asks about one thing.

GDP = C+G+I+NX
That is, GDP is the sum of consumption, government spending, investment, and net investments. So, the change in GDP is the same as the change in any of these components.

a. This one is tricky. You might think that this is investment because the word "investment" is used. Actually, buying investment advice is consumption. Since the client married her advisory, he won't be consuming as much investment advice. Since consumption decreases, GDP decreases. This demonstrates one of the failures of GDP to capture all of the value produced by an economy. The wife is providing the same valuable investment advice as before. But it's not counted as consumption in GDP because she doesn't charge for it.
b. Since the tennis player is unpaid, this does not change GDP.
c. This is very tricky. Buying public utilities is consumption. Buying antipollution equipment is consumption. But the question asks about the installation of the equipment. GDP is unaffected by the installation of the equipment. GDP is the same if the equipment is bought and installed as it would be if the equipment were bought and uninstalled.

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