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 million contains $10 million worth of engines and $12 million worth of instruments and other parts. The value added by the Alabama plant makes up the remaining $18 million.

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?

please don't share the below solution

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

Answer 1

Exports will be included in GDP of Usa=5(40)=200 million

5 planes purchased in usa will also include under investment =5(40)=200 million

Now engines are imported so imports =10(10)=100 million.

Here value added is profit actually. Under territorial system it will either return to Europe or remain in usa. We assume it remains in usa.

So increase in Gdp=200+200-100=300million.Note we do not need to include value of intermediate goods as they are included in final price