GDP knowledge, Continued

The next example for the GDP formula:

         My mother sells her house in New Orleans to a Swedish woman for $200k

Here we go again with English grammar: the subject is "My mother".  Did what? "sell her house in New Orleans". The sale of a house causes something to the GDP. We can assume that the mother is American, making some money on the sale of the house. That would increase GDP, by $200k. But to whom does she sell? "to a Swedish woman".  That falls under "NX", so is minus $200k. In other words, this transaction's net effect is zero on the GDP.

                    I buy a Japanese made lawnmower for $200

"I buy", means it adds $200 to the GDP, namely to the "C" which stands for consumption.  "Japanese made", means it will be an "NX" function, so will be a - $200. The net result will be zero addition to GDP.

                      I buy a new home in California for $500k

"I buy" again means an increase to the GDP. This time it is an investment, so comes under "I". Remember only a brand new house does not come under consumption, but is an investment. This will add $500k to the GDP. If you sell the house 10,12,15 years later it is not an investment anymore. It will then come under consumption.

                   American Airlines buys a new Airbus jet (made in Europe) for $100m

"American Airlines buys" adds $100m to the GDP. A "new jet", qualifies it as an investment, so falls under "I". But it is "made in Europe", so also falls under "NX" as a negative $200m. The net effect is zero addition to GDP.

So that gives us three examples which do not add to the GDP. No wonder people "protest" and want everyone to "buy American"!
However, that short-sighted. In our first example, the Swedish woman has to either come and live there or rent it out. This means people will be added to New Orleans who need to eat, pay for water, electricity, groceries and much more which will add to the GDP in the long run.

That Japanese lawnmower needs gas, oil and maintenance which will be American, so it will add to the GDP in the long run.

The Airbus jet will include national flights somewhere along the line. Maintenance, labor, fuel, parts, etc., will not all be foreign either so will add to American GDP. In the long run it will keep American airplane factories on their toes to maintain competition. Many foreign airlines buy American made jets too.

     There you have it! look back on these examples put forth by the Khan Academy to get a better picture about GDP.

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