Question

In an open economy, trade is allowed between countries. Assume a consumer purchases $1,000 worth of...

In an open economy, trade is allowed between countries. Assume a consumer purchases $1,000 worth of furniture manufactured in China. Answer the following:

a. Which component(s) of GDP are impacted by this purchase?

b. Does GDP increase, decrease or stay the same? Briefly explain.

c. Does your answer change if the company in China is a U.S. owned company? Why?

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Answer #1

a) Net Exports (Exports–Imports) is the component of the GDP which is impacted by this Purchase.

b) GDP would Decreases. Due to the Purchase of $1000 worth of furniture manufactured in China by a Consumer, the Imports of the US Increase. This leads to a Decrease in Net Exports. Decrease in net Exports leads to a Decrease in GDP.

c) Even if the Company in China is a US owned company, my answer would not change. This is because by definition GDP is the market value of Goods and Services produced within the domestic territory of US during a year. It doesn't matter whether the company is US owned or a Foreign company. Therefore, if a consumer purchases anything from China(or any other country), even if it is bought from a company owned by US in China, it will Decrease the GDP or say such expenditure of the consumer would not be included while calculating GDP thereby decreasing it.

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