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.

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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.

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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.

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Next one.

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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.

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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.