Initially country A exports $12,000,000 to country B and imports $7,000,000 from
ID: 1223677 • Letter: I
Question
Initially country A exports $12,000,000 to country 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. Noew we combine the two countries together as a new country, AB republic and all the international trafes become business 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 expeditures inside AB republic. So according to Bobthe total GDP increases to $19,000,000! Therefore we should combine the whole world into a single GDP to increase the worlds GDP.
Is Bob correct? Please give both your answer and reason.
Thank you
Explanation / Answer
GDP or Gross domestic product is the market value of the total production of final goods and services produced within the national territory. A final product is the one that is produced and hence, sold for direct consumption or investment (in this case, final consumption or investment).
This is true for separate countries A and B but not for the single country AB. When separated, country A exports $12,000,000 to country B since the goods worth $12,000,000 were produced within the boundaries of A. But when it imports $7,000,000 from country B, its net exports, the major component of GDP, falls by this amount so that for country A the net export is $5,000,000. In a similar manner, the amount of net exports for country B it is -$5,000,000.
But when they are united and A sells goods worth $12,000,000 which are received by B. This is not counted in GDP since it is not a final good but an intermediate good. Similarly, when B sells goods worth $7,000,000 which are received by A, this is not counted in GDP since it is not a final good but an intermediate good.
In calculation of GDP, intermediate goods should be excluded since these goods are used to produce other goods. If they are counted in the GDP, then GDP will exhibit two values, the value of final good as well as intermediate good. For example, GDP will include bread but not wheat. It will add smartphone but not its camera or battery.
Hence Bob is wrong