Question

• Commodity firm Metals Inc. is based in China and mines $5M in metal that they sell/export from their Chinese plant to Intel’s U.S. factory.

• Intel takes this metal and uses it to produce processors, which they sell for $25M to Apple’s factory in China.

• Apple uses the processors to make computers, which they sell for $40M to U.S. consumers.

• Even though it’s not realistic, assume there are no other components used at any point along the way.

a. What is the contribution of the above to U.S. GDP?

b. What is the contribution to the GDP of China?

Answer 1

GDP measures value of all final goods and services produced within a country in a given period of time.

Commodity Firm metals Inc which is based in China, mines $5M in metal and export from their Chinese plant to Intel's US factory. Therefore, add to China's GDP = export of $5M. And, add to US GDP = import of $5M.

Intel, which is in USA, takes this metal and uses it to produce processors, which they sell for $25M to Apple's factory in China. Therefore, add to US GDP = export of $25M and add to China's GDP = import of $25M.

Apple uses the processors to make computers, and sell for $40M to US Consumers. So, add to US GDP = import of $40M and add to China's GDP = export of $40M.

A) we know, net export is a component of GDP and net export = export - import.

Here the contribution of the above to US net export = export - import = $(25 -5 - 40)M = - $20M. So, when other components of GDP don't change, the above transactions will decrease US GDP by $20M.

B) contribution to the GDP of China = export - import =$ (5 + 40 - 25)M = $20M. That is, China GDP increases by $20M.