Question

Suppose that early in a​ year, a hurricane hits a town in Florida and destroys a substantial number of homes. A portion of this stock of​ housing, which had a market value of ​$101 million​ (not including the market value of the​ land), was uninsured. The owners of the residences spent a total of ​$6 million during the rest of the year to pay salvage companies to help them save remaining belongings. A small percentage of uninsured owners had sufficient resources to spend a total of ​$15 million during the year to pay construction companies to rebuild their homes. Some were able to devote their own​ time, the opportunity cost of which was valued at ​$4 ​million, to work on rebuilding their homes. The remaining​ people, however, chose to sell their land at its market value and abandon the remains of their houses. What was the combined effect of these transactions on GDP for this​ year? ​$ nothing million. ​(​Hint: Which transactions took place in the markets for final goods and ​services?​)

Answer 1

The transactions that are included in GDP are the market transactions:

1) Payment to construction companies, and

2) Payment to salvage companies.

The opportunity cost of time spent in rebuilding is anon-market production and the loss in property values is a loss of capital stock and therefore both are not included in GDP.

The loss in national welfare produces no change in GDP, because it is not valued in the market place