Question

What counts towards the US GDP? If you have a Japanese company in the US, selling cars worth $100B to Americans ($75B production cost and $25B payed back as dividends to Japan), what effect does this have on the US GDP? Also, if there is a company which causes environmental damages in the US of $10B. Will this also affect the US GDP?

Answer 1

GDP refers to the aggregate monetary value of all goods as well as services during a specific period inside the geographical limits of a nation. The intuitive formula to calculate GDP is :

GDP = Private consumption spendings + Investments + Government spendings + (Exports - Imports)

Now, a japanese company sells cars worth $100 billion to americans, America's GDP will decrease by 100 bllion dollars because imports are deducted from GDP to determine its actual value.However, if the manufacturing of such cars gets done in US only, then the production of cars will only reduce GDP to the extent of dividends paid by the company in Japan.

Environmental damages result in negative impact on the GDP of a country in multiple layers. Firstly, it decreases the country's pollution level which gives countless diseases to the scarce human capital resources of country and, secondly, it often is the cause of natural disasters occuring in an economy. A natural damage of $10 billion, therefore, will reduce the GDP of a country by same amount or even more than that depending on the tolerance level of country..