Question

An American buys a pair of shoes made in Italy. How do the U.S. national income accounts treat the transaction? Net exports and GDP both rise. Net exports and GDP both fall. Net exports fall, while GDP is unchanged. Net exports are unchanged, while GDP rises.

Answer 1

Net export falls, while GDP is unchanged

Step-by-step explanation:

GDP is estimated using the expenditure approach as follows:

`GDP=C+I+G+(X-M)`

Where C = consumer spending

I = investment

G = government expenditure

X-M = net export (X = export and M = import).

When an American buys an Italian shoes, in the US national income accounts,

C (consumer spending) increases by the price of the shoe.

M (import) increases by the price of the shoe, thus reducing X-M (net export) by the price of the shoe.

The net effect of the purchase on overall GDP is therefore zero.