- [Instructor] What I
hope to do in this video is even more examples to make
sure we really understand how various things would be accounted for in the expenditure approach to GDP. Now we have talked about
this in other videos. There's many different
ways of calculating GDP, but in the expenditure approach, you can break it down as being made up of consumption by households
plus investment by firms plus government spending
on goods and services, by the government, and net exports. And so with that out of the way, pause this video and look
at each of these statements and think about what
effect would it have on GDP if we have the expenditure approach and how would it be accounted for in these various categories. Okay now let's work through this together. So this first scenario it
says Ford pays $1 million for a U.S.-made robot for
its factory in California. So we have a firm right over here. It is Ford. And it's investing in physical capital. And in most cases, well especially if you're
looking at some type of a standardized test on an AP exam, investment is firms investing
in physical capital, although it can also be
on intellectual capital, things like software. But this is very clear, it's Ford buying a U.S.-made
robot, physical capital. This robot is going to help
Ford make more cars or trucks or whatever it's trying to make. So this is a very clear
that it would increase GDP, so GDP would go up, by $1 million because of this, $1 million. And the place that it
would be accounted for is in investment. So I could say investment
would go up $1 million. Or the reason why GDP goes up $1 million or you would add $1 million to GDP is because you would add
$1 million to investment. This is a clear investment by a U.S. firm. All right now let's look
at the next scenario. A U.S. car rental
company spends $1 million to buy 30 new Fords that
were made in the U.S. So pause this video again
see if you can think of that. Well this is a very similar scenario. A U.S. car rental company, and it is investing in physical
capital right over here. By buying those 30 new
Fords, it can rent those out to create future benefit. And so once again it
would be the same thing. In that first case, GDP
would go up by a million because investment goes up by a million, and in this case as well, GDP would go up by $1
million because investment went up by $1 million. Now let's look at this third scenario. A U.S. car rental
company spends $1 million to buy 30 new Toyotas
that were made in Japan. So how is this different? Well in this scenario, you still would have a U.S. firm investing in physical capital,
it's spending $1 million. So you actually would, you would actually have
investment go up by $1 million. But it's not investing
in things that are made in the United States. It's investing in things
that are made in Japan. So in this particular scenario, it will be counteracted by net exports. Here we are importing $1
million worth of things, and so that would take net exports, so net exports would
go down by $1 million. A $1 million import is the same thing as a negative $1 million net export. And so because of these two, this will have no impact on GDP. No impact on GDP. And the reason why this
makes intuitive sense is remember GDP is supposed to measure how much a, how much was produced, and in this scenario a car
rental company is investing but it was produced someplace else. It wasn't produced in the United States. Now this third scenario, a Japanese car rental
company spends $1 million to buy 30 new Fords that were
made in the United States. So this is almost a
symmetrically opposite scenario. So we would not add to investment here because this was a
Japanese car rental company and we're calculating
GDP for the United States or at least that's the assumption. But because the U.S. would
export these 30 new Fords for $1 million, that
would add to net exports. So in this case, net exports, let me do the net export color, net exports would go up by $1 million. And because net exports
went up by $1 million and nothing else here is impacted, GDP, GDP would go up by $1 million. And once again the reason
why this makes sense is United States produced
$1 million worth of stuff. It happened to export them out, and that's where it got accounted for, but definitely GDP is $1
million higher because of this. So this next one is interesting. You buy $100,000 of IBM stock. What do you think this is? Pause this video again. So you in traditional language, you might say I invested
$100,000 of IBM stock. But I'm a household,
so how does this work? Well it turns out that
this does not move any of these dials right over
here because at least the assumption here is that you are buying that $100,000 of IBM
stock from someone else. It is not, it is not because
something is being made in the United States, there's some new productivity
that's happening. And so even though in everyday language we sometimes think of
this as in investment, this has no impact on
any of these categories. So no, no impact. And I really wanna emphasize that. Investment is sometimes
associated with things like buying stocks, but investment in the
GDP sense is when a firm is buying some type of capital that'll give it some future benefit, help it make things better. Oftentimes it's physical capital. More and more it's often
things like software or some type of intellectual capital. Microsoft buys $100 million of IBM stock. This one might be even
more tempting to put in the investment category
because Microsoft for sure is a firm, and it looks
like it's investing in another firm. But once again, Microsoft isn't buying some
type of physical machinery or it isn't buying an accounting system or some type of intellectual capital. It's just buying shares from someone else. So once again nothing
new is being produced in the country, so this has no impact. I really wanna emphasize these last two because this shows up on some exams where it says oh this kinda
feels like an investment, at least in everyday language, so people would account for it there. But remember, no new capital. Microsoft isn't buying
something that's going to help Microsoft produce more of whatever Microsoft is trying to produce. All right this next one, the Social Security Administration makes a $2,000 payment to a retiree. What do you think's going on there? So you might be tempted to
say hey that's a government expenditure, the Social
Security Administration, they're spending $2,000. But we have to remind ourselves, this G category is government expenditure on goods and services, not a transfer payment like this. And so this would have no, no impact. Another intuitive way to think about it, and we've been talking
about this for awhile, nothing new is being
produced in the United States because of this payment. Now we can contrast that
with the next scenario right over here. The Social Security Administration buys a new accounting system. Well in this scenario, the government is buying
a good or service. It might be a combination of both. They might have to buy some computers, some software, maybe hire some consultants to implement it for them. So it is the government
paying for goods and services. So in this situation, our government category would go up by however much they're spending. Let's say they spend, let's say this was I don't know $1 million again. So then the government would, the government category
would go up by $1 million because it's a good or
service it's spending, and because of that GDP would go up by $1 million. Hopefully you enjoyed that.