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Assuming Car Motors in Tiny Country has 1m USD and it spends it on workers and suppliers to produce 1m USD worth of cars (cost) for export at 2m USD (1m USD profit).

A tsunami hits and drags all the cars under the ocean rendering them worthless.

Assuming the workers and suppliers spent 500k USD (of the 1m USD from Car Motors) to produce the car and hid the other 500k USD under their pillows.

Will the GDP of Tiny Country be zero? 500k USD? or 1m USD?

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  • $\begingroup$ So the answer is consistent at 2.5m USD representing: 2m USD selling price of the cars + 500k USD money spent by the workers & suppliers $\endgroup$ – Jun Dalisay Feb 17 '17 at 12:08
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2.5 m. Because GDP calculates the final price of Factory goods produced,consumption- which the workers and suppliers spent their cash, and a few other components.

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USD 2.5m, I would agree with that conditionally.
2m worth of final goods were produced. The workers did not spend the 500k they saved.

BUT: you wrote that the suppliers spent the money to produce the car. Depending on the interpretation of the question, the GDP can be different. Since it says explicitly "to produce the cars", those 500k would be intermediate goods that do not enter. There was no consumption. Thus my final answer would be USD 2m (only the cars)!

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GDP is equal to the Wages + Profits at every stage of production.

Stage 1: Unnamed company sells 1M as profit in car parts to Car Motors (If the goods are imported then that 1M does not factor in, also assuming it was pure profit)

Stage 2: Car Motors Turns the car parts into cars 500K is given out as wages to workers 1M is made in profit for the company.

Total GDP gain: 2.5 M.

If a tsunami destroys all the cars it means that the cars cannot be sold and the profit for the company is $0.

Thus GDP gain is 500K in wages paid out to workers.

Edit: The reason you are getting conflicting answers is due to a lack of information.

GDP = Investment (I) + Government Spending (G) + Consumption (C) + Exports (EX) - Imports (IM)

It is always assumed that Investment = Savings (Look up the IS relation). So if the workers were savings all of their earnings I = 500K and if they spent it all in the economy C = 500K. Either way you have 500K in GDP gain from wages. Since the cars are being exported EX = 2,000,000 for a total of 2.5M assuming the export occurs. If it doesn't then only the wages are counted.

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