Question

A baker located in San Diego buys milk from Wisconsin (cost is $4), our from

Florida (cost is $4) and cream cheese from France (cost is

$6) to produce a cheesecake. The owner of a restaurant in Manhattan { a Canadian

citizen { buys this cheesecake from the baker for $20 and serves it to a young customer,

Masih, who goes there in the afternoon to have a snack. Masih is charged $15 for the

cheesecake.

(a) By how much does U.S. GDP increase?

(b) By how much does U.S. GNP increase?

Answer 1

Gross National Product (GDP) includes the value of all final goods and services produced within an economy during a given time period. Gross National Product (GNP) differs from GDP in that it takes into account the Net Factor Income from Abroad (NFIA) as well. NFIA is the difference between the income earned by non-residents in the home country and the income earned by residents in another country.

In the given question, milk, flour and cream cheese are counted as intermediate goods as these are used in the making of cheesecake - the final good. Their values will be added together while calculating the price of the cheesecake which is our final good.

Now, when the Manhattan restaurant owner buys the same cheesecake from the San Diego baker at $ 20, the cheesecake is still considered an intermediate good as it is not yet sold for final consumption. It is merely bought by the Manhattan restaurant owner for the purpose of serving customers at the restaurant. It will counted as a final good when it is actually sold for final consumption (to the end user). So, when the young customer is served the cheesecake at $15, the cheesecake is counted as a final good and it's value of $15 is added to the GDP of the USA as consumption expenditure.

NOTE  that cream cheese was imported from France at $6, the price of which was added to the price of the cheesecake - our final good. The same cream cheese will be subtracted from Net exports (Exports - Imports) while calculating GDP and hence, it's impact will be nullified.

Hence, the GDP of USA will increase by $15.

GNP includes GDP plus the income earned by Americans abroad. In the given question, there is no mention of the earnings of Americans abroad for the specified period and so factor income from abroad is zero; GDP of $15 equals GNP in our question. Hence, it can be said that GNP of the USA also increases as much as the GDP, that is, by 15%.

Hence, the GNP of the USA will increase by $15.

Note that the Manhattan restaurant owner is a Canadian resident whose income from the restaurant will be sent back to Canada and added to Canada's GNP. We didn't consider the $15 earned by the Canadian in NFIA as it doesn't impact GNP of USA; the netting of income occurs when there are incomes from both ends and we have no information on American incomes from abroad.