Suppose that in 2013, geologists discover large reserves of oil under the tundra

Question

Suppose that in 2013, geologists 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 begin exploratory pumping during that same year. In the process of loading some of the oil onto tankers at a port, one company accidentally creates a spill into a bay and ultimately pays $1 billion to other companies to clean it up. New workers spend $30 million on food, $200 million in new houses that are built, and $500 million in existing houses are sold. What is the combined effect of these events on GDP for the year? Show your work. Why is it not completely accurate in measuring the well-being of society? What does it not account for?

Explanation / Answer

The combined effect of these events on the GDP is that the GDP will increase for the year. And the GDP will grow by 2billion and 730 million. As we all know, Gross Domestic Product (GDP) is the broadest quantitative measure of a nation's total economic activity. More specifically, GDP represents the monetary value of all goods and services produced within a nation's geographic borders over a specified period of time. In our question the following components will add up to the GDP: Cost in oil exploration + cost in oil spill cleaning + food cost + new houses + existinng houses = summing all these the GDP comes to 2 billion 730 million.

The GDP does not account for the market value estimated at $50 billion at current oil prices.

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