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 ANA's activities and its transactions affect U.S. and Japanese GDP.

Short answer

The production in Japan increases Japanese GDP and the assembly in the U.S. increases U.S. GDP. Sales to ANA increase U.S. GDP and decrease Japanese GDP.

Step-by-step solution

- Identify the Production Location

Boeing produces components in Japan and assembles the aircraft in the United States. This means that the manufacturing of the components contributes to Japanese GDP, while the final assembly contributes to U.S. GDP.

- Analyze the Sale Transaction

Much of the Dreamliner's first year production is sold to ANA, a Japanese airline. The purchase of the aircraft by ANA would be considered an export from the United States to Japan, impacting the GDPs of both countries.

- Impact on U.S. GDP

The assembly of the Dreamliner in the U.S. and subsequent sale to ANA increases U.S. GDP because the final product is exported. Exports are an addition to GDP in the expenditure approach calculation.

- Impact on Japanese GDP

The payment made by ANA to Boeing for the aircraft decreases Japan's GDP, as it represents an import. However, the production of components in Japan contributes positively to Japanese GDP as part of domestic production.

- Summarize the Transactions

In summary, the production of the aircraft components in Japan raises Japanese GDP, the assembly in the United States raises U.S. GDP, the export of the finished aircraft increases U.S. GDP, and the import by ANA decreases Japanese GDP.

Key concepts

GDP Calculation

Gross Domestic Product (GDP) is one of the most fundamental indicators used to measure the economic performance of a country. It represents the total monetary value of all finished goods and services produced within a country over a specific period. GDP is typically calculated in three main ways:

• Production Approach: This calculates the total output of goods and services, minus the value of the goods and services used up in production processes (intermediate consumption).
• Expenditure Approach: This calculates the total spending on the nation’s final goods and services over a specific period. It includes consumption, investments, government spending, and net exports (exports minus imports).
• Income Approach: This sums up total national income, including wages, rents, interest, and profits.

The exercise demonstrates the expenditure approach to GDP calculation, particularly focusing on the dynamics between exports and imports. The assembly of components in the U.S. and its subsequent sale to ANA, a Japanese airline, affects both countries' GDP through international trade activities.

Exports and Imports

Exports are goods and services produced domestically and sold to foreign buyers, contributing positively to a nation's GDP. In this case, the Dreamliner aircraft assembled in the United States and sold to Japan's ANA airline is considered an export for the U.S. This transaction adds to U.S. GDP since exports are a critical component in the expenditure approach.

Conversely, imports are goods and services purchased by domestic buyers from foreign producers, which are subtracted from GDP calculations. When ANA buys the Dreamliner, this transaction is an import for Japan, which reduces its GDP by the value of the aircraft purchased.

Understanding the balance of exports and imports is crucial for grasping how international trade shapes national economies. In the exercise, Japan imports the completed aircraft but also produces key components domestically. This local production boosts Japanese GDP, illustrating the nuanced interplay between export and import activities.

International Trade

International trade involves the exchange of goods and services across national borders. It has significant implications for GDP calculations of the involved countries. Through trade, countries can benefit from specialization, where they produce goods in which they are most efficient, and trade for other needed items.

The exercise highlights how Boeing’s operations create complex trade relationships between the U.S. and Japan:

• Components manufactured in Japan contribute to Japanese GDP.
• These components are then assembled in the U.S., contributing to U.S. GDP.
• The final product, the Dreamliner, is sold to ANA in Japan, counted as a U.S. export.

This transaction increases U.S. GDP due to the export, while the import for Japan reduces its GDP, though the Japanese production of components provides a positive contribution to Japan’s GDP. Such transactions illustrate how interconnected and interdependent economies are in the age of globalization.