Question

Boeing is producing some components of its new 787 Dreamliner in Japan and is assembling it in the United States. Much of the first year's production will be sold to ANA (All Nippon Airways), a Japanese airline. Explain how Boeing's activities and its transactions affect U.S. and Japanese GDP.

Short answer

Japan's GDP increases from component production. The U.S. GDP increases from assembly and export sales to ANA.

Step-by-step solution

Identify Production Locations

The production of some components of the 787 Dreamliner takes place in Japan, while the assembly occurs in the United States.

Impact on Japanese GDP

Since components of the 787 Dreamliner are manufactured in Japan, this adds to the GDP of Japan. GDP measures the value of goods and services produced within a country. Therefore, the production value of these components will be included in Japan's GDP.

Impact on U.S. GDP

The assembly of the Dreamliner in the United States contributes to the U.S. GDP. The value added by assembling the plane is considered part of the U.S. GDP since the final assembly and some production take place within the U.S.

Sales to ANA and Impact on GDP

When the Dreamliner is sold to ANA, a Japanese airline, it represents an export for the U.S. Exports increase a country's GDP. Thus, the sale of the assembled Dreamliner will add to the U.S. GDP.

Summarize GDP Impact

In summary, Japan's GDP increases due to the production of aircraft components. The U.S. GDP benefits from both the assembly of the aircraft and the export sales of the Dreamliner to ANA.

Key concepts

Gross Domestic Product (GDP)

Gross Domestic Product (GDP) is the total market value of all final goods and services produced within a country in a given period. It acts as a broad measure of overall domestic production and a yardstick for economic health. GDP includes only the value of production that occurs within a country’s borders. For example, when Boeing produces the aircraft components in Japan, this production value will be counted in Japan’s GDP. However, the assembly in the United States contributes to the U.S. GDP as it represents economic activity within the U.S.

The GDP can be calculated in three main ways: production (value-added), income, or expenditure approach. Understanding these methods helps in grasping how economic activities like those of Boeing impact GDP. For instance, the expenditure approach sums up consumption, investment, government spending, and net exports (exports minus imports). Exporting the 787 Dreamliner to ANA boosts the U.S. GDP by increasing net exports.

International Trade

International trade involves the exchange of goods and services between countries. This exchange is beneficial as it allows countries to access products not available domestically and specialize in producing goods where they have a comparative advantage. In the case of the 787 Dreamliner, international trade entails both the import of components from Japan to the U.S. and the export of the assembled aircraft from the U.S. to Japan.

When Boeing sources components from Japan, it increases imports for the United States. This aspect can initially reduce the U.S. GDP because imports are subtracted in the GDP calculation. Conversely, once the Dreamliner is exported back to Japan, it increases U.S. exports, positively affecting the U.S. GDP. Trade dynamics like these highlight the interconnected nature of global economies.

Production and Assembly

The concepts of production and assembly are crucial in understanding value addition at each stage of manufacturing. Production refers to creating components or parts, while assembly means putting these parts together to form a final product. Boeing’s strategy of producing Dreamliner components in Japan and assembling the aircraft in the U.S. illustrates these steps.

Value addition does not happen solely at the assembly stage but occurs at each phase of production. In Japan, producing the components adds value, contributing to Japan’s GDP. Subsequently, assembling the Dreamliner in the U.S. adds additional value, which is recognized in the U.S. GDP. This separation emphasizes that the economic contributions of a product are distributed across different locations, reflecting a global production network.

Exports and Imports

Exports and imports are two fundamental elements of international trade. Exports are goods and services sold to other countries, while imports are those bought from other countries. For Boeing, exporting the finished Dreamliner to Japan and importing its components from Japan illustrate these two concepts.

Exports contribute positively to a country’s GDP. When Boeing sells the Dreamliner to ANA in Japan, it counts as an export from the U.S., thus enhancing the U.S. GDP. On the other hand, imports represent an outflow of domestic resources and are subtracted in GDP calculations. Therefore, importing components from Japan initially reduces the U.S. GDP. However, the subsequent export of the assembled jet balances this out.

Understanding the flow of exports and imports helps in appreciating how global supply chains and trade activities influence national economies.