Question

Airbus (a European consortium) operates a plant in Alabama. To make a commercial aircraft, the plant purchases engines from a factory in Germany and instruments and assorted parts from aerospace companies in California. The Alabama plant manufactures the frame and assembles the aircraft. A typical Airbus plane which costs $40 mill contains $10 mill worth of engines and $12 mill worth of instruments and other parts. The value added by the Alabama plant makes up the remaining $18 mill.

Suppose that a total of 10 planes are made in the Alabama plant. Five of them are sold to domestic U.S. carriers and the other 5 are sold to carriers in E. Asia. How would U.S. GDP and its components be affected by the production of these 10 Airbus planes in Alabama?

Answer 1

Domestic purchase of the planes will increase gross domestic private investment and overseas purchase will increase exports. Value of enigines imported from Germany will increase imports, deducted from GDP.

Increase in exports = 5 x $18 Million = $90 Million

Increase in gross domestic private investment = 5 x $18 million = $90 million

Increase in imports = Engine cost = 10 x $10 million = $100 million

Total increase in GDP ($ million) = Increase in exports + Increase in gross domestic private investment - Increase in imports

= 90 + 90 - 100

= 80