For each of the following scenarios, classify the type of spending (C,I,G,Xn), describe its impact on gross domestic product (increase, decrease, not impacted), and explain your answer.

Question

1. A new airplane purchased by United Parcel Service
2. The tuition you pay during your first year of college
3. The social security check your grandmother receives
4. A new purchase of 50,000 shares of Time/Warner stock
5. A new pair of tennis shoes made in China and purchased by an American shoe store

Answer 1

1. Investment Spending (I). The airplane is considered a capital good, because it will be used by UPS to deliver packages. The production of this airplane increases GDP
2. Consumer Spending (C). Private education expenses, like tuition, are considered consumer spending, even though some people describe education as an "investment." Educational services are an addition to GDP, so GDP it will increase.
3. This is a transfer payment, so it will have no direct effect on GDP. Transfer payments are the movement of money from one party to another, with no good or service being exchanged in return.
4. This is a financial asset purchase, and it has no direct effect on GDP. Financial transactions do not involve the production of new goods or services, so they do not count towards GDP. (Tip: watch out for questions that refer to stock purchases but include mention of "commission" or transaction fees. These additional costs to purchasing stock are considered a payment for a financial service, so they are counted in GDP.
5. These shoes were imported into the US, so they are not counted in the US GDP. They were produced in China, and GDP only measures domestic production. The shoes would count towards Chinese GDP, however.