0:00:00.770,0:00:02.680 What I've done here[br]is listed a bunch 0:00:02.680,0:00:05.307 of events that might[br]occur in a given period. 0:00:05.307,0:00:07.140 And what I want to think[br]about in this video 0:00:07.140,0:00:11.560 is how, if at all, they might[br]be accounted for in GDP, 0:00:11.560,0:00:13.990 especially in this[br]expenditure view of GDP. 0:00:13.990,0:00:16.320 And I encourage you[br]to pause this video 0:00:16.320,0:00:17.640 and try it out yourself. 0:00:17.640,0:00:20.690 See how, if each of these[br]events happen in the period 0:00:20.690,0:00:23.360 for which we are trying[br]to calculate GDP, 0:00:23.360,0:00:26.000 how would they be accounted[br]for, according to the buckets 0:00:26.000,0:00:28.760 we thought about, the[br]composition of the expenditure 0:00:28.760,0:00:30.160 view of GDP. 0:00:30.160,0:00:31.960 So now I'm assuming[br]that you have unpaused, 0:00:31.960,0:00:34.460 you've tried it yourself, and[br]so let's try to go through it. 0:00:34.460,0:00:36.760 So Khan Academy is a firm. 0:00:36.760,0:00:37.960 It's a not-for-profit firm. 0:00:37.960,0:00:39.340 No one really owns Khan Academy. 0:00:39.340,0:00:43.250 I guess society owns Khan[br]Academy, but it is a firm. 0:00:43.250,0:00:45.410 So Khan Academy employs[br]a software engineer 0:00:45.410,0:00:47.520 and pays them $100,000. 0:00:47.520,0:00:50.960 Well, this is a firm[br]making the expenditure. 0:00:50.960,0:00:52.636 And arguably and[br]even conceptually, 0:00:52.636,0:00:53.760 this also is an investment. 0:00:53.760,0:00:57.240 Because this $100,000 is going[br]to be used to develop code 0:00:57.240,0:00:58.840 that has future benefit. 0:00:58.840,0:01:02.350 So this is going to be[br]the investment category. 0:01:02.350,0:01:04.390 Let me do it in that same color. 0:01:04.390,0:01:11.150 So I, investment, is going[br]to get plus $100,000. 0:01:11.150,0:01:15.616 In general, the spending by[br]firms goes into investment. 0:01:15.616,0:01:17.240 Now, let's look at[br]the second scenario. 0:01:17.240,0:01:19.720 Accenture, which is[br]another firm, and this 0:01:19.720,0:01:23.690 is a for-profit firm, earns $10[br]million-- or maybe I should say 0:01:23.690,0:01:28.570 gets $10 million[br]in revenue, just 0:01:28.570,0:01:33.900 to be clear what we're[br]talking about-- by building 0:01:33.900,0:01:35.840 a new IT system for California. 0:01:35.840,0:01:38.090 And the important thing to[br]think about, you might say, 0:01:38.090,0:01:40.820 oh, OK, wait, this is[br]OK, Accenture is a firm, 0:01:40.820,0:01:44.650 but California is[br]clearly the government. 0:01:44.650,0:01:46.210 So how do you account for this? 0:01:46.210,0:01:48.970 And it's the[br]expenditure view of GDP. 0:01:48.970,0:01:53.650 So in this situation, California[br]is spending $10 million 0:01:53.650,0:01:57.450 in the period for[br]a new IT system. 0:01:57.450,0:01:59.760 So this is going[br]to be government. 0:01:59.760,0:02:03.220 The government category is going[br]to be increased by $10 million, 0:02:03.220,0:02:06.340 because of this expenditure. 0:02:06.340,0:02:07.160 Now next one. 0:02:07.160,0:02:09.250 My mother sells her[br]house in New Orleans 0:02:09.250,0:02:11.930 to a Swedish woman for $200,000. 0:02:11.930,0:02:14.780 Once again, a[br]house is being sold 0:02:14.780,0:02:17.660 from someone in the country[br]to someone who was foreign, 0:02:17.660,0:02:18.680 what do we do? 0:02:18.680,0:02:20.390 But the important[br]thing to realize 0:02:20.390,0:02:22.540 is that this is not a new house. 0:02:22.540,0:02:24.690 This is a transfer[br]of an existing house. 0:02:24.690,0:02:26.510 Nothing was produced here. 0:02:26.510,0:02:30.359 So this has no[br]contribution to GDP. 0:02:30.359,0:02:32.900 It doesn't matter it's a Swedish[br]woman or anything like that. 0:02:32.900,0:02:34.110 The house existed before. 0:02:34.110,0:02:35.350 It just changed hands. 0:02:35.350,0:02:37.380 A new house did[br]not get produced. 0:02:37.380,0:02:40.320 So nothing happens to GDP here. 0:02:40.320,0:02:41.290 Next one. 0:02:41.290,0:02:43.391 I-- and I'm assuming[br]that I am here, 0:02:43.391,0:02:45.140 sitting here in Mountain[br]View, California, 0:02:45.140,0:02:47.950 American citizen-- I[br]buy a Japanese made 0:02:47.950,0:02:50.600 lawn mower for $200. 0:02:50.600,0:02:53.290 Now this one is interesting. 0:02:53.290,0:02:55.320 Because if you think[br]about it theoretically, 0:02:55.320,0:02:57.080 nothing was produced[br]in the United States, 0:02:57.080,0:03:00.020 so nothing should be added[br]to GDP on a net-net basis. 0:03:00.020,0:03:01.940 And we'll see that that[br]is actually the case. 0:03:01.940,0:03:04.810 But it's going to show up[br]by adding to consumption 0:03:04.810,0:03:07.040 and then taking away[br]from net exports. 0:03:07.040,0:03:08.990 So two things are[br]going to happen here. 0:03:08.990,0:03:12.020 We'll say, OK, Sal is[br]an American consumer. 0:03:12.020,0:03:14.150 If we just look at how[br]much more he spent, 0:03:14.150,0:03:17.890 he spent $200 more, so it's[br]going to be added there. 0:03:17.890,0:03:21.230 But then we're going to[br]take it out of net exports. 0:03:21.230,0:03:27.160 So net exports-- let me do it[br]in that same green color-- net 0:03:27.160,0:03:28.230 exports. 0:03:28.230,0:03:30.020 Everything else is neutral. 0:03:30.020,0:03:31.580 So in this thing[br]right over here, 0:03:31.580,0:03:33.660 there was no foreign purchases. 0:03:33.660,0:03:36.430 But there is me buying[br]a foreign product. 0:03:36.430,0:03:38.100 And let me subtract that out. 0:03:38.100,0:03:41.640 So I'm going to subtract[br]out $200 right over there. 0:03:41.640,0:03:45.350 So net exports will[br]be lower by $200, 0:03:45.350,0:03:47.280 because essentially[br]this was a $200 import. 0:03:47.280,0:03:49.820 And that completely[br]cancels out the $200 0:03:49.820,0:03:51.720 increase in consumption. 0:03:51.720,0:03:54.820 And so this will have[br]zero net effect on GDP. 0:03:54.820,0:03:57.640 These two terms will cancel out. 0:03:57.640,0:04:03.210 Now I buy a new home in[br]California for $500,000. 0:04:03.210,0:04:05.590 Now household spending[br]for the most part 0:04:05.590,0:04:10.670 is considered C, except when[br]you are buying a new home. 0:04:10.670,0:04:14.760 So even though I am[br]not a firm, because I 0:04:14.760,0:04:19.899 am buying a house, a new house,[br]this will go into investment. 0:04:19.899,0:04:24.170 So investment will[br]go up by $500,000. 0:04:24.170,0:04:28.110 And then finally American[br]Airlines buys a new Airbus jet, 0:04:28.110,0:04:30.690 and Airbus jets[br]are made in Europe. 0:04:30.690,0:04:32.650 So what's going to happen here? 0:04:32.650,0:04:35.530 So once again,[br]net-net, nothing was 0:04:35.530,0:04:36.920 produced in the United States. 0:04:36.920,0:04:40.320 So on a net basis, this[br]should not contribute to GDP. 0:04:40.320,0:04:42.810 And we'll see that on net[br]basis, it will break out, 0:04:42.810,0:04:46.170 it will be neutral, but it[br]will be like this situation. 0:04:46.170,0:04:48.169 There's an American firm[br]that made a purchase-- 0:04:48.169,0:04:49.960 and actually, I didn't[br]put the amount here. 0:04:49.960,0:04:52.134 So let's say it[br]was $100 million. 0:04:52.134,0:04:54.550 I think that's actually about[br]what a passenger plane might 0:04:54.550,0:04:57.890 actually cost, for $100 million. 0:04:57.890,0:04:59.760 So the way we would[br]account for it, 0:04:59.760,0:05:03.480 investment would go[br]up by $100 million. 0:05:03.480,0:05:08.512 You have an American firm[br]making a purchase, $100 million. 0:05:08.512,0:05:09.720 Conceptually, it makes sense. 0:05:09.720,0:05:11.720 It's going to provide[br]future goods and services, 0:05:11.720,0:05:13.750 going to give[br]transportation to people. 0:05:13.750,0:05:20.200 But it's going to be netted out,[br]because you have a net import. 0:05:20.200,0:05:23.030 So what this is going[br]to do to net exports, 0:05:23.030,0:05:25.590 on this side of it, you're[br]going to have $100 million, 0:05:25.590,0:05:26.716 because this was an import. 0:05:26.716,0:05:28.631 So you're going to have[br]negative $100 million, 0:05:28.631,0:05:30.780 when you think of it from[br]an export point of view. 0:05:30.780,0:05:34.430 And you had no corresponding[br]positive export. 0:05:34.430,0:05:37.920 So you're going to have net[br]exports-- net exports is 0:05:37.920,0:05:40.590 going to go down $100 million. 0:05:40.590,0:05:42.670 This was a net import[br]of $100 million, 0:05:42.670,0:05:44.950 so it makes sense that[br]net exports would go down. 0:05:44.950,0:05:46.900 It would be negative[br]net exports. 0:05:46.900,0:05:48.820 And these two, once[br]again, are going 0:05:48.820,0:05:50.880 to cancel out with[br]each other, so that you 0:05:50.880,0:05:53.240 have no net GDP,[br]which makes sense, 0:05:53.240,0:05:57.130 because this plane was not[br]produced in the United States.