Question

Smith, a U.S. citizen, has been working as an executive of a telecommunication company in U.S., and her annual salary in 2014 was US$150,000. Her salary was expected to remain unchanged if she continued to work in the company. At the end of the year 2014, however, she was recruited by a media company in Brazil, so she started working in Brazil from January 2015, making an annual salary of US$210,000. Assuming that the amount of her salary equals the amount of her contribution to the production in the company she works for, how much the annual U.S. GDP and GNP in 2015 was changed due to her job relocation? Clearly show the reasoning for your answer.     

Answer 1

To answer this question we should first have a clear idea about the GDP and GNP.

Gross Domestic Product or GDP of a country refers to the total market value of output produced domestically(within the country's national border) in a particular fiscal year.

Gross National Product or GNP of a country refers to the total market value of output produced by the residents of that country across the world.

For, eg, suppose there are some residents of Brazil who are now living in U.S. and working for the production sector and there are some residents of U.S. who are now living in Brazil and working for the production sector

Now, the calculation of the GDP of U.S. only takes care of the value of production, which is produced domestically. No matter whether these outputs are produced by U.S. residents or the Brazil's residents, If they are currently living in U.S. and produced output within the national border of U.S., it will be included in the calculation of GDP of U.S.

On the other hand, for calculating GNP of U.S. we have to first subtract the market value of output produced by residents of Brazil living in the U.S., and secondly, we have to add the market value of output produced by residents of US living in Brazil.

Hence,

GNP of US = GDP of US +(Market value of output produced by residents of US living in Brazil - Market value of output produced by residents of Brazil living in U.S.)

Or, GNP of US = GDP of US + Net factor income generated by U.S. residents across the world.

Now come to the given problem -

Given that, Smith, a U.S. citizen, has been working as an executive of a telecommunication company in the U.S. and assuming that the amount of her salary equals the amount of her contribution to the production in the company she works for, we can calculate the change in GDP and GNP of U.S. in 2015 in the following way -

Since she started working in Brazil from January 2015, the amount of her contribution to U.S. GDP reduced by the amount given by her salary of US$150,000 which she was receiving working for the company in U.S. [As she is now working outside the country U.S., so it will not be included in the calculation of GDP]

For calculating the change in the calculation of GNP, we have to consider the fact that though Smith is now working for the Brazil Company, she is still a U.S. citizen and a migrant to Brazil. So, as we have already discussed that his income will be still counted under GNP of U.S.

Now, note that when she was working for the U.S. Company she receives a salary of US$150,000, and now when she is working for the Brazil company she receives a salary of US$210,000.

Thus her contribution to GNPof US has increased by (210,000 - 150,000) = US$60,000 in the year 2015 [Note that when she was working for the U.S. company as a citizen of U.S. she was contributing for U.S. GNP by the amount of her salary of US$150,000]

The annual GDP of the U.S. reduced by US$150,000.

The annual GNP of the U.S. increased by US$60,000.