You just bought a 10-year-old house. The house is located in a expensive neighbo

Question

You just bought a 10-year-old house. The house is located in a expensive neighborhood. You do have to do some repairs. How does that transaction influence GDP? If the house is purchased with the assistance of a real estate agent, is this payment included in GDP? You then hired a local contractor to re-do the wiring. You paid the contractor $10,000. . The contractor had to buy new wire. How does the purchase of wire by the contractor influence GDP? What if you had done the wiring yourself? In this case, you bought $2,000 in wire to complete the task. How would this influence GDP? Why do the two methods of wiring the house have different implications for calculating GDP when the actual production (a house rewired) is the same?

Explanation / Answer

You just bought a 10-year-old house. The house is located in a expensive neighbourhood. You do have to do some repairs. How does that transaction influence GDP?

Because the house is 10 years old, its purchase will not be included in GDP. It was counted 10 years ago in GDP 10 when it was built.

If the house is purchased with the assistance of a real estate agent, is this payment included in GDP?

As you have hired a real estate agent, therefore the agent’s fee should be counted in GDP. The agent produced a service in the current time period, bringing together the buyer and the seller of the house.

You then hired a local contractor to re-do the wiring. You paid the contractor $10,000. . The contractor had to buy new wire. How does the purchase of wire by the contractor influence GDP?

The entire contractor’s wiring fee is included in GDP. The purchase of wire will not be counted in GDP, because the wire is already included in the contractor’s fee. Here the wire is an intermediate good.

What if you had done the wiring yourself? In this case, you bought $2,000 in wire to complete the task. How would this influence GDP?

If the new homeowner did the wiring in the house, then only the purchase of the wire would count in GDP because in this case, the wire is a final good.

Why do the two methods of wiring the house have different implications for calculating GDP when the actual production (a house rewired) is the same?

There are differences in the two approaches to wiring the house. It's because the household production that does not enter a market is not counted in GDP.

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