In year 1 a USowned corporation sets up golf ball production

In year 1 a U.S.-owned corporation sets up golf ball production in Mexico. In year 2 they produce and pay $100,000 in labor costs to Mexican workers. The golf balls are shipped back in year 2 to the U.S. and sold for an amount of $1,200,000. What are the effects on U.S. and Mexican GDP and GNP in year 2

Solution

In year 2,

(a) US

GDP increases by $(1,200,000 - 100,000) = $1,100,000 (Profit made by US firm by selling golf balls in US)

GNP decreases by $100,000 (labor cost paid to Mexican workers decrease the net net income from abroad]

(b) Mexico

GDP increases by $100,000 (labor income earned by Mexican workers).

GNP has no change.