Examples of accounting for GDP

What I've done here is listed a bunch of events that might occur in a given period. And what I want to think about in this video is how, if at all, they might be accounted for in GDP, especially in this expenditure view of GDP. And I encourage you to pause this video and try it out yourself. See how, if each of these events happen in the period for which we are trying to calculate GDP, how would they be accounted for, according to the buckets we thought about, the composition of the expenditure view of GDP. So now I'm assuming that you have unpaused, you've tried it yourself, and so let's try to go through it. So Khan Academy is a firm. It's a not-for-profit firm. No one really owns Khan Academy. I guess society owns Khan Academy, but it is a firm. So Khan Academy employs a software engineer and pays them $100,000. Well, this is a firm making the expenditure. And arguably and even conceptually, this also is an investment. Because this $100,000 is going to be used to develop code that has future benefit. So this is going to be the investment category. Let me do it in that same color. So I, investment, is going to get plus $100,000. In general, the spending by firms goes into investment. Now, let's look at the second scenario. Accenture, which is another firm, and this is a for-profit firm, earns $10 million-- or maybe I should say gets $10 million in revenue, just to be clear what we're talking about-- by building a new IT system for California. And the important thing to think about, you might say, oh, OK, wait, this is OK, Accenture is a firm, but California is clearly the government. So how do you account for this? And it's the expenditure view of GDP. So in this situation, California is spending $10 million in the period for a new IT system. So this is going to be government. The government category is going to be increased by $10 million, because of this expenditure. Now next one. My mother sells her house in New Orleans to a Swedish woman for $200,000. Once again, a house is being sold from someone in the country to someone who was foreign, what do we do? But the important thing to realize is that this is not a new house. This is a transfer of an existing house. Nothing was produced here. So this has no contribution to GDP. It doesn't matter it's a Swedish woman or anything like that. The house existed before. It just changed hands. A new house did not get produced. So nothing happens to GDP here. Next one. I-- and I'm assuming that I am here, sitting here in Mountain View, California, American citizen-- I buy a Japanese made lawn mower for $200. Now this one is interesting. Because if you think about it theoretically, nothing was produced in the United States, so nothing should be added to GDP on a net-net basis. And we'll see that that is actually the case. But it's going to show up by adding to consumption and then taking away from net exports. So two things are going to happen here. We'll say, OK, Sal is an American consumer. If we just look at how much more he spent, he spent $200 more, so it's going to be added there. But then we're going to take it out of net exports. So net exports-- let me do it in that same green color-- net exports. Everything else is neutral. So in this thing right over here, there was no foreign purchases. But there is me buying a foreign product. And let me subtract that out. So I'm going to subtract out $200 right over there. So net exports will be lower by $200, because essentially this was a $200 import. And that completely cancels out the $200 increase in consumption. And so this will have zero net effect on GDP. These two terms will cancel out. Now I buy a new home in California for $500,000. Now household spending for the most part is considered C, except when you are buying a new home. So even though I am not a firm, because I am buying a house, a new house, this will go into investment. So investment will go up by $500,000. And then finally American Airlines buys a new Airbus jet, and Airbus jets are made in Europe. So what's going to happen here? So once again, net-net, nothing was produced in the United States. So on a net basis, this should not contribute to GDP. And we'll see that on net basis, it will break out, it will be neutral, but it will be like this situation. There's an American firm that made a purchase-- and actually, I didn't put the amount here. So let's say it was $100 million. I think that's actually about what a passenger plane might actually cost, for $100 million. So the way we would account for it, investment would go up by $100 million. You have an American firm making a purchase, $100 million. Conceptually, it makes sense. It's going to provide future goods and services, going to give transportation to people. But it's going to be netted out, because you have a net import. So what this is going to do to net exports, on this side of it, you're going to have $100 million, because this was an import. So you're going to have negative $100 million, when you think of it from an export point of view. And you had no corresponding positive export. So you're going to have net exports-- net exports is going to go down $100 million. This was a net import of $100 million, so it makes sense that net exports would go down. It would be negative net exports. And these two, once again, are going to cancel out with each other, so that you have no net GDP, which makes sense, because this plane was not produced in the United States.