Explain why buying a foreign car made abroad for $50,000 increases consumption by $50,000, but...

Question:

Explain why buying a foreign car made abroad for $50,000 increases consumption by $50,000, but does not increase GDP.

Gross Domestic Product:

The gross domestic product refers to a measure of the total monetary value of domestic production or. The metric is used to determine the economic health of a country.

Answer and Explanation:

Buying a foreign car made abroad does not increase the Gross Domestic Product. The reason for the argument is because GDP entails goods and services produced within a country?s boundaries. In this case, the car is manufactured in another country but consumed in a different country. Notably, imports of finished goods and services do not increase the GDP because they are produced in other countries. As thus, the fact that the car is produced in a foreign country means that it barely increases the GDP of the country of consumption.

Basically, buying a foreign car increases consumption in the country by $50,000. Purchasing the car is the final purpose of economic activity. Buying the car increases consumption because it raises the usage of finished goods. In other words, it is a form of consumer spending. Notably, an increase in the consumption of local products increases the GDP while an increase in the consumption of foreign products does not result to a rise in GDP.


Learn more about this topic:

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Gross Domestic Product: Definition and Components

from Economics 102: Macroeconomics

Chapter 4 / Lesson 3
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