1. AI Inc. is a fast-growing developer of artificial intelligence software for business applications. In 2020 its total revenue from sale of its services was $100 million. During that year, AI Inc. paid its employees $50 million dollars to develop new software and $15 million for marketing and service delivery of its pre-existing software. AI Inc. also spent $25 million on intermediate inputs produced by other companies that it needs for its marketing and service delivery.

(a)If the Bureau of Economic Analysis (BEA) treats all the spending by AI Inc. as cost of production of services that it delivers, what would be the company's value added (i.e., its direct contribution to the US GDP)? Why? Please explain the logic of your answer; an answer that only provides a numeric value is an incomplete one.

Answer:

2. Now suppose that BEA treats new software development as investment (i.e., it considers the spending on new software as cost of producing investment goods that AI Inc. buys from itself to create production capacity for future use). This means that BEA only counts marketing, service delivery, and intermediate inputs as cost of production of the services that AI Inc. supplied to other companies in 2020. In this case, what would be the company's value added (i.e., its direct contribution to the US GDP)? Why? Please explain the logic of your answer; an answer that only provides a numeric value is an incomplete one.

Answer: