Question

Ryan is a Canadian resident who lives with his family in Victoria, Canada, but works for a small donut cafe in Seattle, U.S., where he commutes every day. On a typical day, Ryan produces 400 donuts that sell for $ 1 apiece. Of the revenue from selling the donuts, Ryan is paid $ 260 per day. The remaining $ 140 revenue is distributed as follows: $ 35 pays for inputs such as water, flour, sugar, butter, and energy, $ 70 is rent for using the facilities and interest for an initial loan to start the business, and $ 35 goes to salary to the manager and profit to the owner of the café.

a)      How much is the increase in U.S. GDP generated by the production of the 400 donuts?

b)      How much is the increase in U.S. GNP generated by the production of the 400 donuts?

c)   How much is the increase in Canada’s GDP generated by the production of the 400 donuts?

d)   How much is the increase in Canada’s GNP generated by the production of the 400 donuts?

Answer 1

a) The GDP of USA will increase by $400 because GDP is the sum of values of all goods and services produced within the boundaries of the country.

b) The GNP will increase by $140 because NFI for USA will be -$260 i.e. the income to Ryan will be the NFI.

c) The GDP of Canada will increase by 0 because the donuts production is taking place in USA.

d) The GNP will increase by $260 because the income earned by Ryan will be added as NFI.