Examples of accounting for GDP | GDP: Measuring national income | Macroeconomics | Khan Academy

Thinking about how different types of expenditures would be accounted for in GDP

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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.