If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:8:06
AP.MACRO:
MEA‑1 (EU)
,
MEA‑1.A (LO)
,
MEA‑1.A.3 (EK)

Video transcript

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 dollars for a us-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 what 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 us-made robot physical capital this robot is going to help forward 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 dollars because of this 1 million dollars and the place that it would be accounted for is in investment so I could say investment would go up 1 million dollars or the reason why GDP goes up 1 million dollars where you would add 1 million dollars to GDP is because you would add 1 million dollars to investment this is a clear investment by a US firm all right now let's look at the next scenario a US car rental company spends 1 million dollars to buy 30 new Ford's that were made in the US so pause this video again see if you can think of that well this is a very similar scenario a US car rental company and it is investing in physical capital right over here by buying those 30 new Ford's 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 be would go up by a million because investment goes up by million and in this case as well GDP would go up by million dollars because investment went up by a million dollars now look at this third scenario a US car rental company spends 1 million dollars to buy 30 new Toyota's that were made in Japan so how is this different well in this scenario you still would have a US firm investing in physical capital its spending a million dollars so you actually would you would actually have investment go up by 1 million dollars but it's not investing on in things that aren't 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 a million dollars worth of things and so that would take net exports so the net exports would go down by 1 million dollars a 1 million dollar import is the same thing as a negative 1 million dollar net export and sen and so because of these 2 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 dollars to buy 30 new Ford's 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 US would export these 30 new Ford's 4 million dollars 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 dollars and because net exports up by $1,000,000 and nothing else here is impacted gdb GDP would go up by one million dollars and once again the reason why this makes sense is the united states produced 1 million dollars worth of stuff it happened to export them out and that's where it got accounted for but definitely GDP is 1 million dollars higher because of this so this next one is interesting you buy a hundred thousand dollars of IBM stock what do you think this is pause this to you 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 hundred thousand dollars 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 an investment this has no impact on any of these categories so no no impact and I really want to emphasize that investment too 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 or is some type of intellectual capital Microsoft buys one hundred million dollars 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 want to emphasize these last two because this shows up on some exams where it says now this kind of 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 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 a while 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 spent let's say this was I don't know $1,000,000 again so then the government would the government category would go up by one million dollars because it's a good or service that's pending and because of that and GDP would go up by one million dollars hopefully you enjoyed that