Dr. Strangelove and Mr. Bean have a debate on the issue of GDP. Dr. Strangelove:

Question

Dr. Strangelove and Mr. Bean have a debate on the issue of GDP. Dr. Strangelove: “I think we can merely combine different countries together as a single country to increase the total GDP.” Mr. Bean: “That is ridiculous. Ceteris paribus, the combination CAN NOT increase the total outputs and thus no influence on the total GDP. ” Dr. Strangelove: “Well my friend, let us look at a simple example. Initially country A exports $12,000,000 to country B and imports $7,000,000 from country B. Thus for country A the net export is $5,000,000 while for country B it is -$5,000,000 which have a sum of zero. Now we combine the two countries together as a new country, AB republic, and all the international trades become businesses inside AB republic. Therefore, both the $12,000,000 and the $7,000,000 should be counted into the total GDP since they are now all expenditures inside AB republic. ” Mr. Bean: “Hey you are correct. Then the total GDP increases $19,000,000!” Dr. Strangelove: “Therefore we should combine the whole world into a single country to increase the total GDP of the world.”

Is Dr. Strangelove’s argument correct? Please give both your answer and your reasons.

Explanation / Answer

No, this is not correct.

If A and B are separate countries,

A’s GDP = Export – Import = $12,000,000 - $7,000,000 = $5,000,000

B’s GDP = Export – Import = $7,000,000 - $12,000,000 = -$5,000,000

Net effect = A’s GDP + B’s GDP = $5,000,000 - $5,000,000 = 0

If “A” and “B” are combined together into a single country AB republic, import and export between them are not possible any more.

AB republic’s GDP = Export – Import = 0 – 0 = 0

Conclusion: The separation effect and the combined effect become similar. Therefore, GDP can’t be increased through combining countries.

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