Dr. Strangelove and Mr. Bean have a debate on the issue of GDP. Dr. Strangelove:
ID: 1223582 • Letter: D
Question
Dr. Strangelove and Mr. Bean have a debate on the issue of GDP. Dr. Strangelove: "I think we can merely combine different countries together as a single country to increase the total GDP." Mr. Bean: "That is ridiculous. Ceteris paribus, the combination CAN NOT increase the total outputs and thus no influence on the total GDP. " Dr. Strangelove: "Well my friend, let us look at a simple example. Initially country A exports $12, 000, 000 to country1 B and imports $7, 000, 000 from country B. Thus for country A the net export is $5, 000, 000 while for country B it is -$5, 000, 000 which have a sum of zero. Now we combine the two countries together as a new country, AB republic, and all the international trades become businesses inside AB republic. Therefore, both the $12, 000, 000 and the $7, 000, 000 should be counted into the total GDP since they are now all expenditures inside AB republic. " Mr. Bean: "Hey you are correct. Then the total GDP increases $19, 000, 000" Dr. Strangelove: "Therefore we should combine the whole world into a single country to increase the total GDP of the world." Is Dr. Strangelove's argument correct? Please give both your answer and your reasons.Explanation / Answer
Yes Mr strangelove's argument is correct that the gdp of a country increases by combining different countries into a single economy but not due to the reason mentioned by him.
GDP = c+g+i+nx
Where c= consumption
G = government spending
I = investment
Nx = net exports -imports
When two countries are combined C= c1 + c2
Simillarly G = g1 + g2
I = I1 + I2
But the term Nx dissapears,
Since there will be no exports to country b also no imports from country a
as both will be single country so Nx term disappears. Therefore the total GDP increases although the net export and net import does notcontribute much.