Question

Assume a car dealer in Pakistan imported 20 cars directly from Japan at a cost of Rs.500,000 per car in 2005. By close of year 2005, 15 cars were sold at Rs.600,000 per car. The remaining 5 cars were sold in 2006 for Rs.550,000 each. How are the GNP and its major components affected in 2005 and in 2006 through this transaction?

Answer 1

Gross National Product = Gross Domestic Product + Net property income from abroad.

GNP = GDP + NPIFA

= C + I + G + (X - M) + NPIFA

For 2005

The transaction increases the C, I, and G components of GNP. Assuming the cars were sold to households, firms, and the government, then the GNP components of C, I, and G increased by:

$15 \space cars × Rs. \space 600,000 = Rs. \space 9,000,000$

The remaining unsold cars by the end of 2005 are counted as inventory. During the importation, all 20 cars added to inventory investment. However, by the end of 2005 only 5 cars remain under inventory investment component of GNP.

Inventory investment

= $Rs. \space 500,000 × 5 \space cars$

$= Rs. \space 2,500,000$

The import component

$M = Rs. \space 5,000 × 20 \space cars$

$= Rs. \space 10,000,000$

The impact to GNP is therefore:

$= Rs. \space 9,000,000 + Rs. \space 2,500,000 - Rs. \space 10,000,000$

$= Rs. \space 11,500,000 - Rs. \space 10,000,000$

$= Rs. \space 2,500,000$

This shows that, the 2005 transactions had a positive impact on GNP. GNP increased by $Rs. \space 2,500,000$

For 2006

The 5 cars sold in 2006 were imported in 2005. As a result, the transaction has no effect on 2006 GNP. The value of the 5 cars has been counted in the GNP of 2005, and it only affects 2005 GNP where they relate.