Final answer:
The purchase of imported cars by U.S. households is initially counted as consumption in GDP accounts, but it is then subtracted out as imports, making the statement false. Imports do not contribute to a nation's GDP because they represent income to another country. A trade deficit negatively affects the GDP calculation.
Step-by-step explanation:
The statement that when U.S. households buy new imported European and Japanese cars, the total value of the cars is counted as part of C (consumption) in the GDP accounts is false. While the purchase of a car by a U.S. household is indeed an act of consumption and initially added to the total consumption in the economy, the GDP calculation corrects for imports. The value of imports, such as foreign cars, is subtracted from the total consumption because they are not products of the domestic economy.
Therefore, when an American buys a foreign product, it gets counted along with all other consumption, but the income generated from this purchase goes to producers in another country. To ensure accurate representation of the domestic economy's output, this consumption is negated by subtracting the value of the import in the 'M' term of the GDP equation.
GDP is particularly sensitive to the balance of trade. If the exports and imports are equal, foreign trade has no effect on total GDP. On the other hand, the presence of a trade deficit, where imports exceed exports, as has been commonly the case in the United States, means that the net export component (exports minus imports) will negatively impact the calculation of GDP.