For instance, if I buy a car that was produced in Germany, how would that affect GDP (if at all)? I think that it would affect consumption since I'm purchasing the car, but then since it was produced in Germany, the same amount would be deducted from net exports.
Similarly, if Jet Blue buys an airplane that was produced in France, that would increase investment but once again decrease net exports since the plane was not produced in the United States, right?
Also, what if someone just buys for instance like an acre of land? Part of me says that the acre of land must have already been included in GDP previously since it was not necessarily produced in the current year, but another part of me thinks that it would still be included since your paying for it now. How would I account for that?
Any help would be great!
well first, land is not a "product" or a "good" by definition.
From Investorwords.com: The total market value of all final goods and services produced in a country in a given year, equal to total consumer, investment and government spending, plus the value of exports, minus the value of imports.
Its just a big equation: spending+exports- imports= GDP
Your imports negate your spending.
Sorry, I guess I dont see how your transactions are not clear cut.
You buy a car that is imported from Germany. Lets say you buy it directly from Germany. Your spending is negated by the value of the import.
Now lets say that you buy a car from a dealership that purchased the car from Germany. (this is not a typical transaction, usually its a consignment type situation). His purchase is negated by the import but yours is now considered part of the GDP. The same applies for JetBlue. The value of their investment isnt realized until they transfer that investment and is therefore not counted.
Have you taken any classes on basis and realized/recognized gain? It is the same principle.
Land is not included, as far as I understand. It is not a good nor a service. However, any reaped from the land would be included, including timber or oil or mineral or rights thereof.
If Jet Blue buys a plane from Germany, they're investment increases GDP, but it is negated by the decrease in imports, correct?
But then let's say I win the lottery and buy that plane from Jet Blue. Why would that be considered part of GDP? In my mind that would be "double counting." The plane was already counted in investments when Jet Blue imported it from Germany, so why would it be counted in consumption again if I now purchase it?
So your scenario is that Jet Blue purchased the plane from Germany. In that instance, the increase is netted out by the decrease by the value of the import. There is no gain or loss recognized in the transaction (even if gain, in the investment, is realized, i.e. there is gain, we just dont count it yet).
Then you come in and buy the plane. Now, there is nothing to take away from the value of the money you are giving, it is "in country" money. Now the increase to the GDP is recognized as well as realized.
Stock is a way of understanding this. When you buy stock, lets say for 1 dollar, you have a basis of 1 dollar in the stock. When the stock price increases to 5 dollars, you have realized a gain of 4 dollars but until you sell, you have no recognized (counted) gain. Then you sell, when the stock is 5 dollars, you have to balance out the initial value, leaving you with a net 4 dollar gain. Lets say you sold it to your buddy for its actual value (5 dollars). Your gain at that point is both realized and recognized, and now he holds the stock with a 5 dollar basis. The same thing keeps repeating itself-- its not double counting because each person's actual purchase price is accounted for and decreases the value.
The same thing happens with the sales of goods that are international. We have been assuming in our examples that the purchase price and the value are the same. There would be of course situations where they arent, and I think in those areas, it might a little clearer to you. In one way, yes, the value gets double counted, but in each instance the fair market value will account for the purchase price, depreciation, or appreciation.
Can i step in on this, drea? lol
GDP is kinda like all the $$ we make from the goods and services we produce. Therefore, buying a car in Germany or a plane in France only increases their GDP, not ours. If you bought the car here, perhaps that would increase our GDP a little for the service but since the car was not produced here it does not increase our GDP. (Technically saying the same thing as subtracting imports i supposed but just another way to think about it...)
As for your lottery winning purchase of a jet (which i would caution you to think twice about this decision lol)...i dont think that is included in GDP. I think we are concerned with first time purchases not used as far as goods go. Feel free to challlenge that thought bc it has been awhile since i had my intro finance class and this is memory talking here....
Maybe im a little off base with the used purchases....
here is a businessweek article that may help you:
Hm, interesting questions.
Well, if you purchase a car from Germany, that's an import. Therefore, not part of consumption spending, net exports only. The money, eventually, gets filtered back into the German economy. Not the US economy.
If Jet Blue purchases an airplane from France, again, the money is filtered back into the French economy. Not ours.
I'm not sure about land though. My professor specified that homes that are not newly produced do not count in the GDP, so I'm assuming that refers to land as well? Not sure though. I have macro tomorrow morning, so I'll definitely ask and get back to you. :)
Import are not included in GDP because it is Gross "Domestic" Product. Imports only come into account when you are talking about GNP Gross National Product, so the purchase of a German car woud only count in adding GNP or Germany's GDP, not the United States.
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